FEDERAL COURT OF AUSTRALIA
Rafferty v Madgwicks [2012] FCAFC 37
TABLE OF CONTENTS
IN THE FEDERAL COURT OF AUSTRALIA | |
VICTORIA DISTRICT REGISTRY | |
GENERAL DIVISION | SAD 123 of 2010 |
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
BETWEEN: | PATRICK CAMPBELL RAFFERTY First Appellant KARAVILLE HOLDINGS PTY LIMITED Second Appellant |
AND: | MADGWICKS Respondent |
JUDGES: | KENNY, STONE AND LOGAN JJ |
DATE OF ORDER: | 20 MARCH 2012 |
WHERE MADE: | MELBOURNE (VIA TELEPHONE TO ADELAIDE) |
THE COURT ORDERS THAT:
1. The appeal in SAD 123 of 2010 be dismissed.
2. The appellants in SAD 123 of 2010 pay the respondent’s costs of and incidental to the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA | |
THE COURT ORDERS THAT:
1. The appeal in SAD 124 of 2010 be dismissed.
2. The appellants in SAD 124 of 2010 pay the respondents’ costs of and incidental to the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
VICTORIA DISTRICT REGISTRY | |
GENERAL DIVISION | SAD 123 of 2010 |
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
BETWEEN: | PATRICK CAMPBELL RAFFERTY First Appellant KARAVILLE HOLDINGS PTY LIMITED Second Appellant
|
AND: | MADGWICKS Respondent
|
IN THE FEDERAL COURT OF AUSTRALIA | |
VICTORIA DISTRICT REGISTRY | |
GENERAL DIVISION | SAD 124 of 2010 |
BETWEEN: | TIME 2000 SYSTEMS (AUSTRALIA) PTY LIMITED First Appellant TIME 2000 OPERATIONS (AUSTRALIA) LIMITED ACN 128 700 541 Second Appellant EMBLETON LIMITED (A COMPANY INCORPORATED IN HONG KONG) Third Appellant STEPHEN GERARD DONOVAN Fourth Appellant |
AND: | PATRICK CAMPBELL RAFFERTY First Respondent SANTORA HOLDINGS PTY LIMITED Second Respondent KARAVILLE HOLDINGS PTY LIMITED Third Respondent MADGWICKS Fourth Respondent |
JUDGES: | KENNY, STONE AND LOGAN JJ |
DATE: | 20 MARCH 2012 |
PLACE: | MELBOURNE (via telephone to adelaide) |
REASONS FOR JUDGMENT
1 These two appeals are from a judgment of a single judge of the Court delivered on 17 August 2010.
2 There are a number of issues that fall for determination. Broadly speaking, the principal issues in appeal SAD 124/2010 are:
(1) whether the Franchising Code of Conduct (“Franchising Code” or the “Code”) applied to two agreements to which the appellants and the first, second and third respondents were parties;
(2) whether the trial judge erred in finding that the first, second and third respondents had made out a case of misleading and deceptive conduct pursuant to s 52 of the Trade Practices Act 1974 (Cth) (“TPA”) against the first, third and fourth appellants;
(3) whether the trial judge erred in holding that s 87 of the TPA would support an order for repayment of moneys by the appellants jointly and severally; and
(5) whether the trial judge erred in finding that the appellants had not made out their claim of breach of retainer against the fourth respondent.
3 The principal issues in appeal SAD 123/2010 are:
(1) whether the trial judge erred in finding that the respondent was not liable pursuant to s 75B of the TPA as a person involved in the contravention of s 51AD of the TPA; and
(2) whether the trial judge erred in not finding that the respondent engaged in misleading or deceptive conduct in breach of s 9 of the Fair Trading Act 1999 (Vic) (“FTA”).
4 In appeal SAD 124/2010, the fourth respondent, Madgwicks, relied on an amended notice of contention dated 20 October 2010; and the first, second and third respondents relied on a notice of contention dated 28 September 2010. In appeal SAD 123/2010, Madgwicks relied on an amended notice of contention dated 24 February 2011. In the main, these notices of contention raised similar issues to the notices of appeals in SAD 123 and 124.
5 For the reasons stated below, we would dismiss both the appeals, with costs.
6 The parties to the appeals fall into three groups. First, there was Mr Rafferty and his two associated companies, Santora Holdings Pty Limited (“Santora”) and Karaville Holdings Pty Limited (“Karaville”). At the relevant time, Mr Rafferty was a businessman. He and persons associated with him were the directors of Santora, the shareholder of which was Karaville. Mr Rafferty and his wife were also the directors and shareholders of Karaville. Except where it is necessary to refer to a person or company specifically, I refer hereafter to Mr Rafferty, Santora and Karaville as the “Rafferty parties”. Mr Rafferty and Karaville are the appellants in appeal SAD 123/2010 (“the Rafferty appeal”) against Madgwicks. Santora is not a party to the Rafferty appeal.
7 Secondly, there was Madgwicks, a firm of solicitors. Madgwicks acted for the Donovan parties, the third group in these appeals.
8 Thirdly, there was Mr Donovan and his three associated companies – Time 2000 Systems (Australia) Pty Limited (“T2SA”), Time 2000 Operations (Australia) Pty Ltd (“T2OA”) and Embleton Limited (“Embleton”). At the relevant time, Mr Donovan, who was experienced in real estate and property development, owned and controlled a group of companies referred to as “the Time 2000 group”. Mr Donovan was the director and secretary of T2SA and T2OA. A company based and incorporated in Hong Kong, Almere Pty Ltd, held the shares in T2SA. Another Hong Kong based company, Welltron Limited, held the shares in T2OA. Almere Limited was the corporate director of Embleton – a Hong Kong incorporated company. Mr Donovan was the director of Almere Limited.
9 Except where it is necessary to refer to a person or company specifically, I refer hereafter to Mr Donovan, T2SA, T2OA and Embleton as the “Donovan parties”. The Donovan parties are the appellants in appeal SAD 124/2010 (“the Donovan appeal”) against the Rafferty parties and Madgwicks. On 14 October 2011, after the hearing of the appeal in SAD 124 and while judgment was reserved, T2SA was wound up by order of a Registrar of the Court.
10 At trial, the Rafferty parties also claimed against Time 2000 West Pty Limited (“T2W”). Both Mr Rafferty and Mr Donovan were directors of T2W, the shares in which were held by Santora (1,700,000 shares) and T2OA (1,769,487 shares). The trial judge made orders affecting T2W. T2W did not appeal against his Honour’s judgment.
11 The litigation resulting in these appeals arose out of events between May 2007 and May 2008, during which time the Rafferty parties entered into a business venture with the Donovan parties, for the purposes of which they incorporated T2W. The business venture involved the sale of Modular Accommodation Units (“MAUs”). The MAUs were to be manufactured in China and sold in Australia.
12 Embleton claimed to hold relevant patent applications, innovation patents and provisional patent applications in Australia and elsewhere.
13 The business venture was established by: (1) Heads of Agreement executed on or about 5 October 2007 (“HOA”); (2) a Joint Venture and Shareholders’ Agreement (“JVSA”) executed on or about 23 November 2007; and (3) a Rights Agreement (“RA”) executed on or about 19 December 2007. Madgwicks prepared all three agreements.
14 The business venture had failed by May 2008. T2W did not arrange the manufacture of, or sell, any MAUs.
Preliminary discussions and meetings about an “exciting business opportunity”
15 In his reasons for judgment, the trial judge described Mr Rafferty’s evidence as to the preliminary discussions and meetings that led the Rafferty parties to enter into the business venture with the Donovan parties and Mr Rafferty’s evidence as to setting up the business. The trial judge found Mr Rafferty to be “an honest witness with a fairly good recollection of events, although his recollection was not perfect”. His Honour added:
I have considered his evidence in light of all the evidence in the case. I have concluded that for the most part I should accept his evidence.
See Rafferty v Time 2000 West Pty Limited (No 4) [2010] FCA 725 (“Rafferty v Time 2000”) at [62].
16 Further, as the trial judge observed, although there were some inconsistencies between Mr Rafferty’s and Mr Levy’s evidence (see below), only Kamila Donovan (Mr Donovan’s spouse) gave direct evidence contradicting Mr Rafferty’s evidence. Mrs Donovan was the only witness called by the Donovan parties. The trial judge said that he had carefully considered her evidence, but that it had not led him “to doubt Mr Rafferty’s honesty or reliability”. See Rafferty v Time 2000 at [125].
17 There were two other reasons given by the trial judge for accepting Mr Rafferty’s evidence as to what he was told by Mr Donovan. These are discussed below.
18 The trial judge’s acceptance of Mr Rafferty’s evidence about the preliminary discussions and the setting up of business was not seriously challenged on the appeals. The following account of these matters is, therefore, mostly derived from the trial judge’s account of Mr Rafferty’s evidence; and, where relevant, from the evidence of Bernard Worthington and Shelley Davis, whom the trial judge also regarded as witnesses of truth. There was also no challenge on the appeals to his Honour’s assessment of their evidence.
19 In May 2007, Mr Rafferty was invited by a friend, Geoff Luff, to a restaurant in Perth to discuss “an exciting business opportunity”. Mr Rafferty arrived at the restaurant in the afternoon, where he met Mr Luff and Jon Brunner and was introduced to the concept of MAUs. Mr Luff told Mr Rafferty, in the presence of Mr Brunner, that “the cost to build the units in China and to ship them to Australia was less than $20,000 per room and that the expected sale prices of the units varied from between $70,000 and $90,000 per unit depending upon size and configuration”: see Rafferty v Time 2000 at [65].
20 Sometime later that afternoon, Mr Rafferty, Mr Luff and Mr Brunner were joined by Mr Donovan and Mr Detsis. The trial judge stated (at [66]) that:
Mr Rafferty was told that Mr Donovan was the principal of Time 2000 Developments (“T2D”), Mr Detsis was the marketing manager and Mr Brunner was the chief executive officer. The parties discussed MAUs and, in particular, cost per square metre, selling prices and market opportunities. At some stage during the meeting, Mr Donovan told Mr Rafferty that a prototype three room accommodation unit was being manufactured in China at that time as a prototype for BMA for use in their Dysart Project in Queensland. From the discussions, Mr Rafferty understood “BMA” to be a reference to an alliance between BHP and Mitsubishi. (Other evidence in the case establishes that BMA operated or was proposing to operate a coalmine in Dysart in Queensland.) A little later, Mr Donovan told Mr Rafferty the name of the Chinese manufacturer of the prototype (he cannot now recall the name which was mentioned) and that it was a business based near Beijing in China. Mr Donovan also told Mr Rafferty that he had met with BHP, Rio Tinto and FMG and that his negotiations with each of them were at an advanced stage.
21 In June 2007, Mr Rafferty and Mr Donovan met a second time, this time in Melbourne. On this occasion, Mr Rafferty, accompanied by Mr Luff, went to a Melbourne restaurant, where they again met Messrs Donovan, Detsis and Brunner, as well as Angus Koch (an employee of Mr Donovan or an associated company) and another person. As to this meeting, the trial judge said (at [67]) that:
Mr Rafferty was told that Mr Koch was the operations manager of Time 2000. At this dinner, Mr Donovan said to Mr Rafferty that the MAUs were “being made in China”. Mr Donovan said that he was getting a prototype made that they would be able to show to prospective buyers. Mr Donovan said to Mr Rafferty that BMA wanted a number of units and Mr Rafferty’s best recollection is that he said 96 units. Mr Donovan also said words to the following effect:
“The mining module prototype is now being manufactured in China for BMA. We will be able to show prospective buyers this unit while we are progressing other designs, but at least they will be able to see the quality we will be offering. Once they see this we will be flooded with orders.”
22 Mr Donovan and Mr Rafferty discussed the matter further the next day. According the trial judge (at [68]):
[D]uring those discussions Mr Donovan told Mr Rafferty (probably at a lunch at a restaurant in the Docklands) the following:
1. Prototypes of the MAUs would be ready to view by Christmas 2007.
2. He expected construction of the MAUs in China to be completed within six weeks of final selection of fittings by an individual client.
3. Two prototypes would be built; one would be delivered to Perth and the other to Melbourne.
4. A company, Mr Rafferty thinks it might have been “CIMC”, had been engaged to manufacture the prototypes. I think it is fair to say, having regard to all the evidence, that Mr Rafferty has no clear recollection of the name of the manufacturer mentioned at various times; it could have been Duowie or it could have been CIMC. On this occasion, Mr Donovan used words to the effect that he had engaged a company called CIMC or Duowie (and in Mr Rafferty’s oral evidence he was reasonably sure it was not Duowie) to manufacture the prototypes.
5. On several occasions, Mr Donovan spoke about an order for 96 units for BMA. He said words to the effect that they had a trial order for MAUs to be delivered to BMA’s Dysart operations in Queensland.
23 The next day, Mr Rafferty, Mr Luff, Mr Donovan, Mr Brunner and others went to lunch at a winery on the Mornington Peninsula. At the lunch, the four men discussed various items of business, including: (1) the territory or area the subject of the proposed venture; and (2) the market and, in particular, whether it would include the mining sector. His Honour continued (at [69]-[70]):
Eventually, it was agreed the proposed venture would include the caravan, tourism and rural sectors, but that it would not include the mining sector. In the course of the discussions on that matter, Mr Donovan said that he was in the advanced stages of negotiations with other parties and he named BMA in particular. Mr Donovan told Mr Rafferty that although BMA was based in Queensland and therefore outside the territory which had been agreed, BHP was particularly interested in a global approach to a contract with T2D. He told Mr Rafferty that BHP was interested in obtaining 5,000 three-bedroom workers’ units per annum. He told Mr Rafferty that a contract had been entered into with BMA for approximately 96 three-bedroom units at $180,000 each.
At this point Mr Luff and Mr Brunner left the discussion group and Mr Rafferty and Mr Donovan were left, as Mr Rafferty put it, “to iron out the details”. They discussed the income to be paid to Mr Rafferty to conduct the business and the amount to be invested by Mr Rafferty. Mr Donovan told Mr Rafferty that he would have to prepare a “marketing strategy” and that every sale, marketing concept and price had to be consistent with Time 2000’s plans, approved by him and be based on the licensed intellectual property. Mr Donovan told Mr Rafferty that they would have to act quickly “as he was very close to production”. The parties discussed the payment of profits and the formation of a company and the payment of profits through the payment of dividends.
24 Mr Rafferty and Mr Luff left Melbourne the day after this conversation and did not return until around 21 June 2007, when there were further discussions. The trial judge said that these discussions were not significant. See Rafferty v Time 2000 at [74].
25 On 21 July 2007, Mr Rafferty received an email from Mr Koch, as to which the trial judge said the following (at [75]-[76]):
The message which is part of the email is in Mr Donovan’s name. It contains a description of the respondents’ business and plans. In the course of the message Mr Donovan states:
“We confirm that our company is well advanced in the commercialisation of a manufactured building system with global reach.
The unique patented intellectual property enables the cost effective manufacture of sophisticated building units in China. We attach documents for your information and hope it is of interest. More will follow in subsequent emails. Please print them to view with ease.”
There were a number of drawings of MAUs attached to the email. In addition, there was a document apparently prepared by Deakin University setting out details of a proposed feasibility study involving what is described as “BHP/Time 2000 Intelligent Sustainable Mining Village”.
26 On 27 September 2007, Mr Rafferty attended a meeting in Melbourne with Mr Donovan, this time at the offices of Deloitte Touche Tohmatsu (“Deloitte”) who were acting for Mr Donovan and his companies. Others at the meeting were John Downes of Deloitte; and Graeme Levy and Susan Harris, both of Madgwicks. The trial judge accepted (at [77]-[80]) that:
The discussion included a discussion about territory and the markets which were to be the subject of the proposed venture. Mr Rafferty said that the fact that there were to be other territories with other people involved was discussed and some names were mentioned. Mr Rafferty was told that some people were possibilities while others were ready to sign. On this topic, Mr Rafferty said that Mr Donovan said words to the following effect:
“If you come upon a potential sale you can discuss the situation with me on a project-by-project basis and I will decide on the outcome. I see no reason why sales outside your territory would be an issue anyway until there are other franchises in other states and you wanted to sell in their territory.
…
The other territories being envisaged at this point are Queensland, New South Wales, South Australia and Victoria/Tasmania. I am close to signing deals in Queensland and Victoria/Tasmania and have prospects lined up for the other territories.
…
I want to float the Time 2000 business at some stage after all the other territories are signed up.”
Mr Levy said words to the following effect:
“Payments from other people in relation to other territories will mirror your agreement.
…
Stephen, through his companies, will have overall control of where the product is sold, how it is marketed and to whom it can be sold.”
There was discussion about financial matters and ownership of the company to be incorporated to carry on the business. Mr Rafferty believed that Mr Donovan would effectively receive $5,000,000 in licence fees for five territories plus 51 per cent of the territory companies without making any financial contribution to those companies. Mr Rafferty said that there was a discussion about a potential float of the Time 2000 business.
Mr Rafferty said that there was some discussion about what would have to happen if the proposed venture involved a franchise. He cannot remember precisely what was said or by whom. He said that he was told that the proposed arrangement did not involve a franchise.
Mr Rafferty said that at the meeting at Deloitte the use of his proposed initial contribution of $200,000 for engineering drawings was first raised. He said that he thought the initial prototype was “already in the works” and the initial prototypes were already done. He thought that must be a reference to the new design.
27 Mr Rafferty lent Mr Donovan the sum of $50,000 on or about 16 August 2007. The trial judge found that “[t]his payment was viewed by the parties as a down payment on the $200,000 to be paid by Mr Rafferty under the HOA”: see below. The trial judge also found (at [82]) that:
Mr Rafferty had time to consider a draft Heads of Agreement and indeed he made some written comments about the document to Mr Donovan and Mr Levy. However, he did not obtain legal or financial advice in relation to the proposed Heads of Agreement.
The trial judge accepted (at [83]) that, at the time Mr Rafferty executed the HOA, Mr Rafferty believed that: (1) there was a prototype for the MAUs under construction in China and that it would be complete and available to be inspected before Christmas 2007; and (2) Mr Donovan was in the advanced stages of discussions with investors interested in other territories.
28 On 8 October 2007, Mr Rafferty paid the sum of $200,000 referred to the HOA: see cl 2. Mr Donovan repaid the $50,000 he had borrowed from Mr Rafferty: see Rafferty v Time 2000 at [84].
29 On about 5 October 2007, Mr Rafferty entered into the HOA with Mr Donovan, Embleton and T2SA, pursuant to which the parties agreed that a new company would be incorporated (subsequently, T2W). The HOA provided that T2W was to market, sell and install the MAUs in Western Australia and the Northern Territory “for short term stay accommodation for the purposes of ... tourism ... and rural accommodation ... and remote-area laboratories for use on mining sites”.
30 In Rafferty v Time 2000 at [36]-[38], the trial judge described the terms of the HOA as follows:
Under the HOA, Mr Rafferty agreed to pay into the trust account of Madgwicks, who were the lawyers for T2SA, what was called a seed fee of $200,000 immediately, and that seed fee would be paid to T2W on its incorporation (clause 2). T2W was to use that money to defray the costs and expenses of forming the company, the costs and expenses of engaging consultants to prepare documentation and commence working drawings for the prototype (as defined) and the costs and expenses of preparing the HOA and initial drafts of other agreements contemplated by the HOA. If the HOA was terminated the seed fee was to be paid to T2SA; it was not repaid to Mr Rafferty.
The HOA provided that T2SA was to hold 51 per cent of the shares in T2W and a company to be incorporated by Mr Rafferty was to hold the other 49 per cent. The decisions of shareholders were to be made by simple majority (clause 4). The board of directors of T2W was to comprise one director appointed by T2SA and one director appointed by the company to be incorporated by Mr Rafferty. The first directors were to be Mr Donovan and Mr Rafferty.
The parties agreed that the company to be incorporated by Mr Rafferty [subsequently, Santora] would pay $1,000,000 to the trust account of Madgwicks as a licence fee pending execution of a Rights Agreement and upon execution of the Rights Agreement the money would be paid to Embleton (clause 6.1). … Under the HOA, the parties agreed that Santora would also pay $500,000 as working capital into an account to be established by T2W (clause 6.1). The parties agreed that Santora could be required to pay up to a further $3.3 million on the occurrence of certain events specified in the HOA and according to the times prescribed by the HOA for the production of modular building units (clause 6.3).
31 The HOA contemplated the execution of further agreements, including a Joint Venture and Shareholders’ Agreement (“JVSA”) and a Rights Agreement (“RA”). His Honour continued (at [39]-[41]):
On the face of it, T2W was not bound to enter into a Rights Agreement with Embleton; it could request Embleton to do so (clauses 5.2 and 8.1). By contrast, Embleton undertook to enter into a Rights Agreement if requested by T2W (clause 8.1). It also undertook that, if requested by T2W to enter into a rights agreement, it would “comply with any applicable pre-contract requirements of the Franchising Code of Conduct”. Clauses 5.2 and 8.1 are in the following terms:
5.2 Rights Agreement
If [T2W] requests Embleton to enter into a Rights Agreement as contemplated by clause 8, the parties shall use reasonable endeavours to ensure that the Rights Agreement is concluded on or before 1 December 2007. [His Honour’s emphasis]
8.1 Undertaking by Embleton
(a) Embleton is a party to this agreement solely for the purposes of giving this undertaking and having the right to enforce any rights or claim in relation to the Time 2000 IP.
(b) Upon request by [T2W], Embleton undertakes that it will:
(i) comply with any applicable pre-contract requirements of the Franchising Code of Conduct; and
(ii) subject to having complied with such requirements, offer to enter into a Rights Agreement with [T2W] on the terms set out in clause 8.2.
32 The “Rights” which were to be the subject of the Rights Agreement were defined as:
… the Rights that Embleton undertakes to grant to [T2W] (pursuant to a Rights Agreement if [T2W] requests Embleton to enter into the Rights Agreement) for exclusive use of the Time 2000 IP in the industry markets within the Territory.
The HOA contained detailed provisions specifying the terms and conditions which were to be included in the Rights Agreement. The Rights Agreement was to include a provision that Embleton grant T2W limited rights to use its intellectual property (clause 8.2(a)) and a provision that T2W use reasonable endeavours to design and build the prototype in China within three months of the date of the HOA (clause 8.2(b)). The prototype was defined in the HOA as a prototype of, or similar to, the Modular Accommodation Unit shown in the plan which was a schedule to the HOA (clause 1.1). The plan showed an MAU which, in the typical case, would be suitable for tourist or rural accommodation and not one which, in the typical case, would be suitable for mining accommodation. The Rights Agreement was to include a provision that Mr Donovan have an absolute discretion to scrutinise proposed sales by T2W at his option on a project by project basis and to approve or deny any product (clause 8.2(c)).
Clause 8.2(d) of the HOA provided that the Rights Agreement must include provisions that T2W shall (among other things):
(ii) use and promote the trademark and the design concepts contained in the Time 2000 IP;
(iii) promote and protect the Time 2000 brand;
(iv) establish a business development capacity to identify and solicit customers for the purchase of modular accommodation units;
(v) develop and design suitable products for the Industry Markets within the Territory.
…
(vii) seek design compliance approval from Embleton;
(viii) seek quotations from and contract with the Embleton approved panel of manufacturers that are satisfactory to [T2W];
…
(x) coordinate a project specific production licence from Embleton in respect of each project order placed with a manufacturer;
…
(xiii) establish display unit(s) and employ required sales persons;
…
(xv) comply with the policies and procedures as defined by Embleton;
…
(xix) [achieve agreed sales targets specified in the agreement]
(xx) prepare and maintain proper financial records with assistance from Deloitte in an Embleton approved format and hold these available to Embleton at all times.
Clause 8.2(f) also provided that:
[T2W] acknowledges that a fee equal to 10% of the price charged to [T2W] by the manufacturer will be payable by the manufacturer to Embleton.
The HOA indicated that the Rights Agreement:
shall otherwise be on the terms on which Embleton enters or intends to enter into other Rights and/or Franchise Agreements in relation to the Time 2000 IP.
33 The HOA defined the “Territory” as “the state of Western Australia and the Northern Territory, Australia but excluding an area comprising a radius of 15 kilometres from the central business district of Perth”. “Time 2000 IP” was defined to mean particular items of intellectual property and
… any statutory and other proprietary rights in respect of trademarks, designs, patents, circuit layouts, copyrights, Confidential Information, know-how and all other rights with respect to intellectual property as defined in Article 2 of the Convention Establishing the World Intellectual Property Organization of July 1967 and Moral Rights Under the Copyright Act (Commonwealth of Australia).
34 Additionally, the HOA made specific provision for the establishment of the business of T2W. In particular, cl 7 stated:
Upon the formation of [T2W] and the establishment of its Board of Directors, [T2W] shall commence establishing the venture business to market, sell and install Modular Accommodation Units in the Industry Markets within the Territory and shall do all things necessary for that purpose.
35 The HOA also made provision for termination, including in cl 5.3, which read:
If this Agreement is terminated pursuant to this clause:
(a) so much of the seed fee as is unexpended shall be paid to [T2SA]
(b) any money paid by [Santora] for the issue to it of further shares under clause 6 shall be refunded to [Santora].
36 The trial judge found that Mr Rafferty paid a sum of $200,000 into Madgwicks’ trust account on 8 October 2007 (at [84]). Although the RA was not executed until 19 December 2007, Karaville, at Mr Donovan’s request, paid the sum of $1,000,000 into Madgwicks’ trust account on 14 November 2007: Rafferty v Time 2000 at [174].
The Joint Venture Shareholders’ Agreement
37 On about 23 November 2007, Mr Rafferty, Santora, T2W and T2OA entered into the JVSA. As the trial judge noted, the JVSA recorded that Mr Rafferty, on behalf of Santora, had paid $200,000 in accordance with the HOA: see JVSA, Introduction, recital E. His Honour described the JVSA (at [44]) as follows:
Clause 5.2 placed an obligation on Santora to pay the sum of $1.5 million to T2W, being $1 million for the rights under the Rights Agreement (in fact that sum had already been paid before the JVSA was executed) and $500,000 to be used by T2W as working capital. There was also provision for further payments of up to $3.3 million by Santora to T2W (clause 5.3). The JVSA provided that T2OA was to hold 51 per cent of the shares in T2W and Santora was to hold 49 per cent of the shares (clauses 4.1 and 5.6). The directors of T2W were to be Mr Donovan as chairman and Mr Rafferty as managing director and chief executive officer. The JVSA provided that Mr Rafferty was to continue as the managing director for three years (clause 8.1). In the event of the board of directors being deadlocked, the chairman (Mr Donovan) had a second or casting vote (clause 8.8). The JVSA provided that Mr Rafferty, as managing director, would be personally liable for the obligations of T2W. As far as I can see, the JVSA contains provisions with respect to a prototype which are similar to those contained in the HOA. In clause 37 of the JVSA each party acknowledged that he or it had had the opportunity to seek legal advice in respect of the terms and conditions of the agreement. One effect of the HOA and the JVSA was that the Donovan respondents controlled T2W both at board and shareholder meetings.
No party to these appeals challenged his Honour’s description of the JVSA.
38 On about 19 December 2007, T2SA, T2W, Embleton, Mr Rafferty, Santora and Karaville entered into the RA, which, amongst other things, provided for T2SA to grant T2W a licence to use certain intellectual property. In Rafferty v Time 2000 at [46], his Honour gave the following account of the RA, which, again, was not disputed:
Under the RA, T2W was to pay what is called a “once-off” licence fee of $1,000,000 to T2SA in consideration of the Licence granted to it by T2SA. It appears that what had happened prior to the execution of the RA is that Embleton agreed to grant to T2SA an exclusive licence to use and exploit its intellectual property in Australia. The sum of $1 million paid by Santora into Madgwicks’ trust account was to be paid to T2SA on behalf of T2W (clause 4). T2SA granted the Licence to T2W and, for the purpose of giving effect to the Licence, T2W was entitled to use the Core IP and any relevant Developed IP (clause 2(a)). T2W agreed that T2SA “may at any time grant other licences provided that such licences do not apply to the Industry Markets within the Territory” (clause 2(b)).
39 “Term” was defined to mean the life of the Patents, and “Territory” was defined in the same way as in the HOA. The RA defined the “Core IP” in some detail. Broadly speaking, “Core IP” meant the intellectual property consisting of: (a) “Embleton Limited Patents and/or Patent Applications”, as identified in an accompanying table; and (b) “Embleton Limited Trademarks” – “Time2000”, “T2” and “Australia Trade Mark 1173883 (T2 Logo)”. The RA defined “Developed IP” as “all Intellectual Property which constitutes a modification, enhancement, improvement, alteration, amendment, development, extension or supplement to, or is otherwise ancillary or relates directly or indirectly to, the Core IP”.
40 Clause 3 of the RA dealt with the permitted use of the Core IP. Relevantly, cl 3(a) stated:
T2W is only permitted to use the Core IP for the purpose of the Licence. T2W must not without the prior written consent of T2SA use the Core IP for any other purpose, or within any other market outside the Industry markets or within any area outside the Territory.
The RA defined the term, “Industry Markets”, as the markets for the supply of Modular Accommodation Units for short term stay accommodation for the purposes of national park accommodation, caravan parks and rural accommodation (excluding the supply of such units for use as motels, hotels, truck stop accommodation, aged care and/or retirement village accommodation except where agreed by T2SA); and remote-area laboratories for use on mining sites.
41 The RA placed certain obligations on T2W in connection with its proposed business of promoting, marketing, selling and installing units within the Industry Markets in the Territory during the Term. Those obligations related to the design and manufacture of the MAUs (cl 8), the marketing and sales of the MAUs (cl 9), the achievement of specified sales targets (cl 10), and the conduct by T2W of its business operations (cl 13.1).
42 Pursuant to cl 8 of the RA, T2W was to design the units and the units were to be manufactured in China. T2W was to comply with reasonable design requirements of T2SA and all reasonable directions of T2SA as to quality control in the design and manufacture of MAUs: see cl 8(b)(i) and (g). T2SA was to approve and license the manufacturers of the units: see cl 8(b)(ii) and (iii). T2W acknowledged and agreed that a manufacturer would pay a fee to T2SA, or a related party, equal to 10 per cent of the price charged by the manufacturer to T2W: see cl 8(h).
43 Pursuant to cl 9 of the RA, T2W was obliged, if and when required by T2SA, to give prominence to the trade marks and trade and brand names associated with the Core IP and the Time 2000 Image (as defined in cl 1.1) in all promotional material referring to the MAUs: see cl 9.1(a). Clause 1.1 defined the Time 2000 Image as “the distinctive image, reputation and presentation of the Core IP, T2SA and any Related Party of T2SA and/or Licensee from T2SA. The words “Time 2000” and any related images and trade marks, brand names incorporating “Time 2000” and “T2”, logs [sic], slogans and colours associated with the Core IP are features of the Time 2000 Image”.
44 Clause 9 of the RA further provided that T2W must at all times use its best endeavours to promote, sell and protect the MAUs and that it must establish display unit(s) and employ sales persons as reasonably required by T2SA from time to time for T2W to fulfil its obligations under the RA: see cl 9.1(b) and (c). Clause 9 stipulated that the MAUs developed and designed by T2W were to be “suitable for the Industry Markets within the Territory and … acceptable to T2SA”: see cl 9.2(a). Clause 9 also gave T2SA discretion to scrutinise proposed sales by T2W to customers on a project by project basis and to approve or refuse any project: see cl 9.3(b). Thus, cl 9.3 read as follows:
(a) Notwithstanding anything in this Agreement, T2W must notify T2SA at least fourteen (14) days before entering into any agreement or accepting any order to sell MAUs in respect of a Project;
(b) T2SA or its nominee, shall have an absolute discretion to scrutinise proposed sales by T2W to customers on a Project by Project basis and to approve or refuse any Project.
45 Clause 10 concerned sales targets. The target for gross sales revenue for year one was $15,000,000 and for year two was $18,000,000. A failure by T2W to achieve sales targets could lead to termination of the RA by T2SA.
46 Clause 13 dealt with the conduct of T2W’s business operations and provided, among other things, that T2W was required: (1) to comply with policies and procedures as required by T2SA from time to time; (2) to prepare and maintain proper financial records with assistance from Deloitte in a format and on a financial management system approved by T2SA and hold those available to T2SA at all times; and (3) to comply with all reasonable directions of T2SA as to quality control in the manufacture and marketing of the units. See cl 13.1(a), (e) and (f).
47 T2W was obliged to use reasonable endeavours to build the prototype (as defined) in China within three months of the date of the RA: see cl 7(a). T2W was obliged to meet the costs of manufacture and of complying with other obligations under cl 7: see cl 7(i). T2W was required to comply with all reasonable directions of T2SA as to quality control in the design and manufacture of the prototype: see cl 7(g). The RA defined the prototype in a similar way to the HOA and JVSA.
48 Certain issues on the appeals render cl 12 especially relevant. Clause 12 stated:
The parties agree and acknowledge that, if at any time T2SA forms the view that the Franchising Code of Conduct applies or might apply to the arrangement between the parties, the parties will sign such documents and do such acts as may be necessary to enter into a Franchise Agreement under which T2SA or its nominee is the Franchisor and T2W is the Franchisee and, save as may be necessary to comply with the provisions of the Franchising Code of Conduct, the terms and conditions of the Franchise Agreement will otherwise be similar to the terms and conditions of this Agreement.
49 On or about 19 January 2008, Santora, having received the funds from Karaville, paid $500,000 to T2W.
50 As noted above, Mr Rafferty, Mr Worthington and Ms Davis gave evidence at trial concerning the setting up of the business. This evidence was accepted by the trial judge – a matter which was not challenged on appeal – and is the basis of the following account.
51 On 15 October 2007, after the HOA was executed, Mr Rafferty used his own funds to open an office for the business operations of T2W. Mr Rafferty arranged for his son, Tom, to work in the business and for his niece, Ms Davis, and a friend, Mr Worthington, to work as commission only operatives to identify and contact prospective customers.
52 In mid October 2007, Ms Davis identified the possibility of a contract with Nitmiluk Tours, for the purchase of tourism units for an ecotourism venture near Katherine Gorge in the Northern Territory. At the end of the month, the representatives of Nitmiluk Tours met Mr Donovan, Ms Davis and Mr Worthington in Katherine. Mr Donovan gave a Powerpoint presentation.
53 Mr Worthington and Ms Davis gave evidence about the meeting in Katherine. The substance of Mr Worthington’s evidence was relevantly the same as that of Ms Davis. Referring to Mr Worthington’s evidence, his Honour accepted (at [110]-[112]):
Mr Worthington met Mr Donovan at the airport in Darwin and they drove to Katherine. During the trip to Katherine, Mr Donovan told Mr Worthington that he had a company in China near Beijing arranged to build the MAUs and Mr Donovan called the company “Do Wei” or similar. Mr Worthington does not recall Mr Donovan specifically saying that he had a contract with Do Wei, but he did tell Mr Worthington about the business and manufacturing process of Do Wei in substantial detail.
… Mr Worthington, Ms Davis and Mr Donovan met with representatives of Nitmiluk Tours. … Mr Worthington understood that they were interested in purchasing as many as 80 MAUs as tourist cabins over two potential sites. Mr Donovan made a presentation to the representatives of Nitmiluk Tours. He offered to provide each unit at a price of $70,000 fully furnished. In the course of the presentation, Mr Donovan said that a prototype was being built in China and that he could guarantee to have a display prototype “here” by the end of February 2008. Mr Donovan said that he could arrange for the whole village to be installed by May or June 2008 at the latest. Mr Pollack [of Nitmiluk Tours] said words to the effect that subject to the representatives of his organisation carrying out an inspection of the prototype which was satisfactory and subject to agreement with plans, specifications, final costing and a fit-out schedule, Nitmiluk Tours were, in principle, happy to proceed with an initial order of accommodation units. Mr Pollack said that Nitmiluk Tours wished to receive the plans and specifications and fit-out schedule within two weeks. Mr Pollack said that Nitmiluk Tours would be interested in 40 units by way of the first stage. There was also discussion about finishes and the dimensions of the units. It was clear that Nitmiluk Tours were looking at MAUs of a high standard.
After the meeting with Nitmiluk Tours, Mr Worthington, Ms Davis and Mr Donovan drove to Darwin. That evening they had dinner with a person who was a representative of the Federal Government and a person from Connell Wagner who were consulting to the government. The meeting concerned the possible purchase of MAUs for housing, as part of the Federal Government’s intervention in indigenous communities in the Northern Territory. During the course of that meeting, Mr Donovan told those present that he had sold 40 units to Nitmiluk Tours that morning. That concerned Mr Worthington because he considered it to be untrue.
54 The trial judge found that, on his return from the Northern Territory, Mr Donovan told Mr Rafferty that he believed Nitmiluk Tours would be placing an order for 10 spa units by 15 November 2007 at $70,000 per unit. When Mr Rafferty asked whether Nitmiluk Tours would want to see a prototype before placing the orders, the trial judge attributed the following words to Mr Donovan (at [90]):
“They are willing to place the order so manufacture of the structures can commence and by the time they see the prototype before Christmas in China, we will be ready to offer the fit out they require. We will also have to fly at least two of the Jawoyn representatives to China to view the prototypes. Will the new company be prepared to pay for this?”
55 According to the trial judge, Mr Rafferty said that he did not think that would be a problem. See Rafferty v Time 2000 at [90].
56 In mid-November 2007, Mr Rafferty, accompanied by Mr Worthington and Ms Davis, met Mr Donovan in Melbourne. The trial judge accepted Mr Rafferty’s evidence that Mr Donovan told Mr Rafferty that the prototypes would not be ready before Christmas, but that they would be ready by the end of January 2008 and would be shipped to Australia by the end of February 2008. See Rafferty v Time 2000 at [92]. The trial judge accepted that Mr Donovan reiterated this information between 23 November 2007 (when the JVSA was executed) and 19 December 2007 (when the RA was executed). See Rafferty v Time 2000 at [94]. Further, the trial judge accepted Mr Worthington’s evidence that Mr Donovan told them in late November 2007 that a prototype of the MAU was “being built” by “Do Wei”. See Rafferty v Time 2000 at [113].
57 According to the trial judge (at [94]-[96]):
Mr Rafferty believed that Mr Donovan had an agreement with an organisation called CIMC or Duowie (as I have said, he was quite unclear as to which) to manufacture the prototypes. He said that he did not know that Mr Donovan did not have an agreement with any manufacturer to manufacture the prototypes.
On 15 December 2007, Mr Rafferty received a copy of an email sent by Mr Donovan to a third party. The email refers to a recent trip to China by Mr Donovan. It suggests that on that trip Mr Donovan “set in place” a manufacturing relationship with Duowie Corporation and had the agreement of a business called B & Q Retail and Wholesale Distributors to sponsor Mr Donovan’s project and prepare all schedules of fixtures and fittings for the prototypes and manage the supply chain on behalf of the project.
Mr Rafferty said that the statement in this email about a manufacturing relationship with the Duowie Corporation was consistent with his understanding at the time. It was only later that Mr Rafferty learnt that there was no agreement with the Duowie Corporation. He referred to an email sent to him on 14 March 2008 with an attachment containing a copy of an email from Mr Brunner to a Mr Leong Kok Yin dated 3 December 2007. That shows quite clearly that, as at 3 December 2007, no plans or drawings had been sent to the Duowie Corporation because that company had not yet signed a confidentiality deed.
58 By about the third week in January 2008, Mr Rafferty realised that the prototype would not be ready by the end of the month; and, in consequence, Mr Rafferty asked Mr Donovan to send him a program setting out the work required to complete the prototype. His Honour said (at [98]):
A program was prepared by Hassells, a firm of architects, and sent to Mr Rafferty. It showed a scheduled completion date in June 2008 and it did not identify a manufacturer. It is clear from the evidence that that prototype relates to the prototype for tourist accommodation not the prototype for mining accommodation. Mr Rafferty said by that time the two types of prototype were becoming blurred.
59 By late January or early February 2008, Mr Worthington was also concerned about the lack of progress with the MAU prototype and the fact that no prototype would be available in February 2008, as Mr Donovan had promised Nitmiluk Tours. See Rafferty v Time 2000 at [114].
60 In early March 2008, Mr Brunner told Mr Rafferty that Mr Donovan had decided not to go ahead with the Duowie Corporation and that he was now in discussion with Sunscape and Bluescope. See Rafferty v Time 2000 at [99]. In late March or early April 2008, Mr Worthington also discovered that “Do Wei” was not contracted to manufacture the MAU prototypes and that, as yet, no company had been contracted to manufacture them. See Rafferty v Time 2000 at [115].
61 In April 2008, Mr Rafferty, Mr Worthington and Mr Donovan travelled to China to meet with potential manufacturers of a prototype MAU. They met with representatives of two manufacturers – Sunscape and Bluescope. At this point, “it was apparent to [Mr Rafferty] that Mr Donovan was still trying to convince each of them to manufacturer the units”. See Rafferty v Time 2000 at [100].
The business relationship breaks down
62 On his return from China, Mr Rafferty and Mr Donovan had another conversation about when the prototypes would be available, in the course of which Mr Donovan said that they would be ready in August 2008. The trial judge recorded (at [101]) that:
There was a discussion about money and, in the course of that discussion, Mr Donovan accused Mr Rafferty of embezzlement. Thereafter, the relationship between Mr Rafferty and Mr Donovan broke down and they ceased to have any direct dealings with each other.
In May 2008, Mr Rafferty, both for himself and on behalf of Santora and Karaville, sought legal advice from Cosoff Cudmore Knox, who acted for him at trial and on appeal. See Rafferty v Time 2000 at [102].
Funds invested by Mr Rafferty in the business venture
63 Under the agreements discussed above, the Rafferty parties paid $1,700,000.
64 The $200,000 (see [28] above) was paid into Madgwicks’ trust account. The sum was used to meet some expenses and the balance was paid into a National Australia Bank account in the name of T2W. Mr Rafferty paid (see [49] above) the amount of $500,000 – designated as working capital – into a Commonwealth Bank account in the name of T2W. At the time of the trial approximately $314,000 remained in that account and a further $25,000 was in a term deposit account. See Rafferty v Time 2000 at [103].
65 One million dollars was also paid into Madgwicks’ trust account and subsequently distributed to Time Developments Pty Ltd ($200,000), T2SA ($300,000), Time 2000 Pty Limited ($250,000), and Gemhall Holdings Pty Limited ($250,000). See Rafferty v Time 2000 at [103].
Madgwicks’ role in setting up the failed business venture
66 Both the Rafferty parties and the Donovan parties sued Madgwicks for the part the firm played in setting up the legal framework for the failed business venture. Both parties blamed Madgwicks for the firm’s supposedly inadequate advice about the Franchising Code.
67 Evidence for Madgwicks was given by Mr Levy, at the relevant time a partner in the firm, and Ms Harris, at that time a solicitor employed by the firm. The trial judge found that both Mr Levy and Ms Harris were honest witnesses: see Rafferty v Time 2000 at [151]. The following summary of their evidence is derived from his Honour’s more detailed account.
68 Mr Levy – an experienced commercial solicitor – met Mr Donovan in July 2007 when they were introduced by Graeme Adams, a partner of Deloitte. Thereafter, Mr Levy undertook some legal work for Mr Donovan. Mr Rafferty’s name was first mentioned on 19 September 2007, when Mr Donovan told Mr Levy that he had an investor (Mr Rafferty) who wanted to invest in the Time 2000 project; and Mr Donovan gave Mr Levy the details of what was proposed. Two days later, on 21 September at the Deloitte offices in Melbourne, Mr Levy met Mr Donovan, and thereafter Mr Adams and John Downes also of Deloitte, to discuss Mr Rafferty’s involvement. In the course of that Melbourne meeting, a telephone call was made to Mr Rafferty, in which prototypes were discussed. Further (according to the trial judge: see Rafferty v Time 2000 at [156]):
Mr Donovan said that Mr Rafferty’s involvement would fast-track a prototype for ecotourism. Mr Rafferty said that he would need a small, single bedroom unit and he said he would be happy to fund such a unit.
69 In the course of a further meeting at the Deloitte offices on 25 September, again attended by Mr Levy, Mr Donovan, Mr Adams and Mr Downes, there was another telephone call with Mr Rafferty. The trial judge noted (at [158]) that “Mr Levy’s evidence [was] that Mr Rafferty said he would bring a solicitor with him to [the next meeting] to act in the matter”.
70 On 27 September 2007, Mr Levy and Ms Harris attended at the Deloitte offices again, where they met Mr Donovan, Mr Adams and Mr Downes. The lawyers first raised the matter of the Franchising Code at this meeting. The trial judge found (at [160]) that:
At an early stage of the discussions, Mr Levy or Ms Harris raised the question of the Franchising Code and whether it would apply to the proposed transaction. One or other of them said that there was a risk that the proposed transaction would be a franchise and that that would necessitate compliance with the Franchising Code. Mr Levy or Ms Harris said that there were strict compliance requirements including disclosure obligations and that Madgwicks would give further consideration to the matter.
71 Mr Rafferty joined the meeting some time after this conversation. In her evidence, Ms Harris noted that at the 27 September meeting “Mr Rafferty said that he had not yet appointed a lawyer”. See Rafferty v Time 2000 at [179].
72 The next day, 28 September 2007, Mr Levy and Ms Harris received instructions to begin drafting the HOA. At the same time, Ms Harris began to consider the issues that might arise under the Franchising Code.
73 On 1 October 2007, Ms Harris sent Mr Downes at Deloitte an email, attaching a draft HOA and a letter signed by Mr Levy and Ms Harris. See Rafferty v Time 2000 at [162]. The letter read:
Attached is a draft of a heads of agreement for consideration by you, Graeme Adams and Stephen Donovan. We have provided a draft directly to Stephen Donovan.
You will see that the heads of agreement does not contain any actual agreement between Embleton and the other parties to enter into the proposed rights agreement. This is because our preliminary research has confirmed that the rights agreement is likely to constitute a franchise agreement under Australian law and, if the Heads of Agreement contains provisions binding the proposed franchisee or its representatives to enter into the rights agreement, it will also be caught under the Franchising Code of Conduct as an agreement to enter into a franchise agreement. The Code requires a franchisor (Embleton) to give a copy of the Franchising Code of Conduct and a Disclosure Document to the prospective franchisee at least fourteen days before entering into a franchise agreement and also gives the prospective franchisee a 7-day cooling period after doing so.
The timeframes in this instance are too tight to allow for what is effectively a 21-day lead time. Accordingly, we have drawn the agreement so that Embleton undertakes to enter into the rights agreement if requested by the new company [] to do so however, we cannot confirm categorically that this will prevent any subsequent attac[k] on the Heads of Agreement on the grounds that it is effectively a non-compliant franchise agreement.
As Stephen will effectively control 51% of [the new company] and as the whole purpose of establishing [the new company] is to enter into the rights agreement we do not believe that there is a risk that [the new company] will not request the rights agreement once it is established.
We have otherwise tried to keep the agreement as succinct as possible. Please let us have your comments so that we can forward the Heads of Agreement to Patrick Rafferty.
74 The trial judge recorded (at [180]) that “Ms Harris’s view was that the risk of the Heads of Agreement and other agreements being non-compliant franchise agreements was ‘very much dependent on whether the agreements imposed a system or marketing plan and the extent of the control over any system or marketing plan reserved to the licensor’”. His Honour continued (at [181]):
Ms Harris said that she contacted lawyers in Perth ... The lawyer she spoke to said that, based on what Ms Harris told her, the Rights Agreement would not constitute a franchise agreement. That was also the view of Ms Harris.
75 Between 1 and 5 October 2007, there were various communications about the draft HOA among those involved in its preparation. On 5 October 2007, Ms Harris sent Mr Rafferty an amended HOA, requesting (amongst other things) that HOA be signed and returned that day.
76 On 8 October 2007, Mr Donovan telephoned Madgwicks to say he would like Ms Harris to begin drafting the JVSA. See Rafferty v Time 2000 at [164]. Also on 8 October, Ms Harris received some further information about the meaning of “franchise agreement” for the purposes of the Franchising Code. The trial judge said (at [166]) (and it is not disputed) that:
On 11 October 2007, Mr Levy and Ms Harris sent a letter to Mr Downes and Mr Adams ... In that letter, they advised Mr Downes and Mr Adams as follows:
1. The Rights Agreement (to be entered into) may constitute a franchise and fall within the Franchising Code.
2. If the Rights Agreement did amount to a franchise agreement, then there were various requirements under the Franchising Code. The broad nature of those requirements w[as] set out.
3. The four “requirements” in clause 4 of the Franchising Code were set out. Mr Levy and Ms Harris ma[d]e the observation that requirements 1, 3 and 4 would be satisfied in the case of a licence agreement. Mr Levy and Ms Harris said:
“It seems that some information or advice regarding marketing may be provided to a licensee without the agreement becoming a franchise but the more structured and prescriptive that information or advice becomes the more likely it is that the agreement will be found to be a franchise agreement. A further difficulty arises with the use of the word ‘suggested’ in requirement 2. It is possible that any commentary or information provided to a licensee relating to methods of best practice, even if application of those methods is expressed to be optional, could bring the agreement within the definition of a franchise.
Accordingly, it is essential that, before we prepare the Rights Agreement, we have full details of the proposed marketing of the Time 2000 product and the extent to which Embleton Pty Ltd proposes to require licensees to adopt a common marketing program. As this is a very specialised area of the law, we suggest that you provide us with a memorandum outlining the manner in which Embleton Pty Ltd proposes that the marketing of the product should be handled and we shall then instruct a practitioner, experienced in the area of franchising law, to advise whether the Rights Agreement is likely to fall within or outside the operation of the Code.”
77 Why the letter was sent to Mr Downes and Mr Adams is presently immaterial: see Rafferty v Time 2000 at [167]. It suffices to say that the letter was discussed with Mr Donovan on 16 October 2007, when Mr Levy and Ms Harris met with Mr Downes and Mr Donovan again at the Deloitte offices. The trial judge recounted (at [169]- [171]) that:
One or other of Mr Levy or Ms Harris referred to the letter dated 11 October 2007. Mr Downes said that the issue was a simple one to deal with in that “we just ensure that we don’t impose a system or marketing plan and therefore avoid satisfying that element of the definition of a franchise”. Mr Dononvan or Mr Downes, or both, advised Mr Levy and Ms Harris that Mr Donovan wanted to avoid creating a franchise because he was in a hurry to consummate the deal with the applicants and there was insufficient time to comply with the formalities required under the Code. Accordingly, the arrangement would be structured to avoid the need to comply with the Code by not creating a franchise.
At that stage, Mr Levy and Ms Harris did not know the final nature of the business set up to be formed by Mr Donovan. In particular, they were still having discussions regarding the structure to put in place with respect to the licensing of the technology. The terms of the Rights Agreement were to be determined. It had been agreed that both parties would have equal control.
At the meeting on 16 October 2007, it was agreed by those present that the matter could be reviewed in January 2008 and that Madgwicks could then brief the firm in Western Australia ... which had specialist expertise in the area of franchising law.
78 Further, the trial judge stated (at [182]) that Ms Harris’s evidence was that, at the 16 October meeting:
Mr Downes said they had received the letter and that Time 2000 would not be providing or imposing a marketing system, policies or procedures and that all such matters would be decided internally by the joint venture company. He said that the memorandum requested in the letter dated 11 October would not be provided. Ms Harris’s best recollection [was] that during the course of the two meetings at Deloitte on 27 September 2007 and 16 October 2007 respectively, they said to Mr Donovan that if the agreement required compliance with the Franchising Code and the Code was not complied with then the agreement would not be enforceable and could be set aside.
79 Ten days later, Ms Harris sent Mr Rafferty a scanned copy of the HOA and a draft JVSA for his consideration. Those involved in the drafting for the proposed venture continued to communicate in the following weeks. See Rafferty v Time 2000 at [172]- [173]. On 4 December 2007, Ms Harris sent Mr Donovan an email to which a current draft of the RA was attached. This draft contained the following as cl 13:
13: Parties will enter into franchise agreement if required by T2SA.
The parties agree and acknowledge that, if at any time during the term of this agreement, T2SA forms the view that the Franchising Code of Conduct applies or might apply to the arrangement between the parties, the parties will sign such documents and do such acts as may be necessary to enter into a franchise agreement under which T2SA or its nominee is the franchisor and T2W is the franchisee and, save as may be necessary to comply with the provisions of the Franchising Code of Conduct, the terms and conditions of the Franchise Agreement will otherwise be similar to the terms and conditions of this agreement.
80 Ms Harris explained in her accompanying email that:
There is a new clause 13 which requires the parties to enter into a Franchise Agreement if that becomes necessary. You may remember that early on we raised the issue of whether the Franchising Code of Conduct applied to the grant of licences. The preliminary view was that it probably didn’t but this would turn on the extent to which the Rights Agreement imposed a system of marketing on T2W as licensee. We agreed in early October that we would seek further advice on this point in January 2008.
See Rafferty v Time 2000 at [175] and also [183].
81 The trial judge accepted Mr Levy’s evidence that Mr Donovan agreed that a system or marketing plan would not be imposed by the licensor (Embleton), “but the parties would revisit this issue if Donovan entered into similar arrangements with other parties and wanted to set up a franchise model”: see Rafferty v Time 2000 at [176]. According to the trial judge (at [178]) “Mr Levy said that at the meetings at Deloitte, either he or Ms Harris said that if the Franchising Code applied and it was not complied with, the Agreement would be unenforceable”.
82 Ms Harris’s evidence (as set out by the trial judge at [183]) was that she and Mr Levy met Mr Donovan on 11 December 2007 when they again discussed the franchise agreement issue and proposed cl 13 (see [79] above). According to Ms Harris, Mr Donovan wanted to tighten up the sub-clause dealing with marketing but she and Mr Levy reminded him that “he should be careful not to impose a marketing system or retain any power to direct [T2W] to carry out its marketing in a particular manner because that might result in the agreement becoming a franchise”.
83 Ms Harris sent Mr Rafferty a draft of the RA on 13 December 2007 and a revised RA, on 18 December, requesting that he sign it if acceptable. See Rafferty v Time 2000 at [177].
84 In early 2008, Ms Harris again mentioned to Mr Downes that possibility of obtaining specialist advice on the franchising issue but was told that Madgwicks should not seek such advice. Later that year, Ms Harris prepared a memorandum dated 23 September 2008 in which she recorded that:
This was in the context of the inclusion of a new clause in the Rights Agreement, which required the parties to enter into a franchise agreement if that became necessary. As we saw it, at some time in the future the licensor might wish to develop a common marketing system for all of its licensees but it would then need to enter into a franchise agreement with each such licensee. The clause was intended to express the willingness of all parties to the agreement to enter into a franchise agreement in that event. We explained this to Stephen at the time and told him that the clause may not be effective to compel Mr Rafferty or any company or interest controlled by him to enter into a franchise agreement if the licensor wished to develop a marketing system.
As we did not receive instructions in relation to the proposed marketing of the product we were never in a position to obtain or provide definitive advice on whether or not any marketing system proposed in respect of the Time 2000 products would cause the Rights Agreement to constitute a franchise agreement under the franchise code and we were confident that Stephen understood this and accepted the risk. We understood that Stephen’s reasons for instructing us not to obtain or provide further advice in relation to the franchising code were that the Rights Agreement did not seek to impose a marketing system (and he understood that the licensor should not impose a marketing system) and, further, that the time constraints within which he required the documents, including the Rights Agreement to be signed and money paid under them, were too tight to comply with the time frames laid down by the franchising code.
I recall that in early 2008 (although not, I believe, in January 2008) I again raised the issue of obtaining expert advice on the franchising issue with John Downes. I reminded him that it had been agreed at the meeting on 16 October 2007 to re-consider the issue of obtaining expert advice on the franchising issue in early 2008. John’s response was that we were not to obtain the expert advice. I received the impression that the only legal work to be carried out at that stage was such work as was required to further current and specific negotiations.
At the present time we still do not know whether any, and if so what, marketing system has been imposed on or suggested to Time 2000 (West) Pty Ltd by the licensor.
See Rafferty v Time 2000 at [184]-[185].
Why Mr Rafferty did not seek his own professional advice and what would have happened if he had done so
85 Mr Rafferty gave evidence as to why he had not sought legal or financial advice before committing himself and his companies to the venture. This evidence (as summarised by the trial judge at [130]) was that:
[Mr Rafferty] did not think he needed legal advice because a lawyer from a reputable legal firm (that is, Madgwicks) was drawing up the agreements. Neither Mr Donovan nor anyone from Madgwicks ever said that Madgwicks were not advising him. As far as financial advice [was] concerned, none of Mr Donovan, Deloitte or Madgwicks ever said to Mr Rafferty that he should obtain financial advice.
86 Mr Rafferty’s evidence at trial was that, if he had been told to obtain legal or financial advice, he would have spoken to James Cosoff of Cosoff Cudmore and Knox, or his accountants, Moore Stephens: see Rafferty v Time 2000 at [131]. Mr Rafferty had been a client of Cosoff Cudmore and Knox since 1998, and Mr Rafferty and Mr Cosoff had had frequent dealings. Mr Rafferty said that he would not have entered into the HOA had he received advice from his lawyers in the terms set out in the affidavits of Mr Cosoff and another solicitor at the firm, William Marryat. In particular, the trial judge noted Mr Rafferty’s evidence that “if he had received the advice outlined by Mr Cosoff and Mr Marryat, he would have provided instructions that he would not commit to, or execute, any agreement until he had seen a prototype modular building unit or been able to satisfy himself that such a prototype would be ready by Christmas 2007”. See Rafferty v Time 2000 at [133].
87 At the trial, Mr Cosoff and Mr Marryat gave evidence as to the advice they would have given Mr Rafferty in October 2007 had he consulted them. The trial judge found that Mr Cosoff and Mr Marryat were honest witnesses and accepted their evidence: see Rafferty v Time 2000 at [135] and [146]. The following account is derived from his Honour’s summary.
88 Mr Cosoff’s evidence was that he had no knowledge of Mr Rafferty’s involvement in the transactions in question until April 2008. He stated what he would have done and the advice he would have given had he been consulted by Mr Rafferty about 1 October 2007. See Rafferty v Time 2000 at [139]-[145]. Amongst other things, Mr Cosoff said that he would have: (1) involved Mr Marryat in advising Mr Rafferty; (2) discussed the Franchising Code with Mr Marryat and Mr Rafferty; (3) advised Mr Rafferty not to proceed with the transaction, at least not on the terms contemplated; and (4) assuming the representations were as alleged, advised Mr Rafferty that “it would be imprudent to commit to payment of any substantial amount of money without having personally confirmed, by a visit to China if necessary, that a prototype was complete or substantially so”. See Rafferty v Time 2000 at [140], [142]-[143], [145].
89 Mr Marryat gave evidence about the advice that he would have given Mr Rafferty, including as to his key concerns: see Rafferty v Time 2000 at [149]. According to the trial judge (at [150]):
Mr Marryat would have considered whether the HOA was a franchise. He would have raised the matter with Mr Rafferty and he would have discussed the ramifications of a franchise and, in particular, the disclosure documents that must be provided under the Franchising Code. He would have given Mr Rafferty advice about the Franchising Code and he would have told him that, given the fact that Embleton and T2SA were associates the HOA “may very well be a franchise agreement”. In any event, he would have told Mr Rafferty that far more work needed to be done before any agreement of this nature was executed.
Mr Marryat would also have encouraged Mr Rafferty to see his accountant.
90 At the trial, the Rafferty parties claimed that the Donovan parties:
(1) contravened s 51AD of the TPA by failing to comply with the Franchising Code, which was an applicable industry code for the purpose of s 51AD. This claim involved the proposition that, in substance, the parties’ agreements, separately or combined, constituted a franchise agreement or agreements.
(2) by reason of their false representations, the Donovan parties engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive within the meaning of s 52 of the TPA. Relevantly, the representations as pleaded were:
(a) the Donovan parties, or one or more of them, had entered into a contract with an entity known as “BMA” said to be associated with BHP Billiton Limited, for the purchase by that entity of approximately 100 modular building units;
(b) the Donovan parties, or one or more of them, had entered into a contract with a company in China known possibly as Duowie or CIMC for it to manufacture modular building units in China;
(c) a prototype modular building unit was being manufactured in China and would be available to T2W in China before Christmas 2007;
(d) a prototype modular building unit was being manufactured in China and would be available to T2W in China by the end of January 2008.
The fourth representation was alleged to have been made some time after the third representation. For present purposes, nothing turns on a fifth pleaded representation.
91 The Rafferty parties’ case against Madgwicks depended on their case against the Donovan parties. The Rafferty parties alleged that: (1) Madgwicks was involved (within the meaning of s 75B(1) of the TPA) in the contravention of s 51AD by the Donovan parties; and (2) by failing to advise them that the agreements would, if executed, constitute a franchise agreement or agreements, Madgwicks had engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive, within s 9 of the FTA.
92 There was a cross-claim against Mr Rafferty in which T2OA alleged that Mr Rafferty had breached and repudiated the JVSA.
93 There was also a cross-claim against Madgwicks, in which the Donovan parties alleged that: (1) Madgwicks acted in breach of the firm’s contract of retainer in that the firm failed to provide adequate advice with respect to the Franchising Code; and (2) if the Donovan parties contravened s 51AD of the TPA, then Madgwicks was knowingly concerned (pursuant to s 75B(1)) in the contravention.
94 Madgwicks cross-claimed and raised a setoff against the Donovan parties, with respect to legal fees allegedly owed by the Donovan parties to Madgwicks. The trial judge ordered that this cross-claim and setoff be heard and determined separately from the issues with which these appeals are concerned. See Rafferty v Time 2000 at [33].
The Decision of the trial judge
95 The learned trial judge upheld the claims of the Rafferty parties against the Donovan parties, but dismissed the Rafferty parties’ claims against Madgwicks. His Honour also dismissed both the cross-claims then before him.
Rafferty parties v Donovan parties: misleading and deceptive conduct claim upheld
96 The trial judge upheld the Rafferty parties’ claim that, by reason of their false representations, T2SA and Embleton engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive within the meaning of s 52 of the TPA; and that Mr Donovan was liable as a person involved in the contravention of s 52 of the TPA (pursuant to s 75B). His Honour’s reasons for so concluding were as follows.
97 At the evidentiary level, the trial judge generally speaking made findings in accordance with Mr Rafferty’s evidence. This was largely because his Honour found that, generally speaking, Mr Rafferty was an honest and reliable witness: Rafferty v Time 2000 at [62]. Further, Mr Donovan did not give evidence, although he sat in court for most of the trial, and, citing Jones v Dunkel (1959) 101 CLR 298, his Honour held that, in these circumstances, he could more readily accept Mr Rafferty’s evidence: see Rafferty v Time 2000 at [120], [126]. His Honour considered, moreover, that the evidence of Mr Worthington and Ms Davis about Mr Donovan’s statements about the availability of prototypes of the MAUs could be relied on as tendency evidence. See Rafferty v Time 2000 at [126].
98 The trial judge found that Mr Donovan made each of the representations (set out at [90] above): see Rafferty v Time 2000 at [196]. His Honour found (at [198]) that each representation was false in that it was not disputed that:
1. None of the Donovan parties had entered into a contract with BMA at any relevant time;
2. None of the Donovan parties had entered into a contract with Duowie or CIMC to build MAUs at any relevant time;
3. None of the Donovan parties had a reasonable basis upon which to believe that a mining or BMA prototype MAU was being manufactured in China and would be available to T2W in China by Christmas 2007; and
4. None of the Donovan parties had a reasonable basis upon which to believe that a mining or BMA prototype was being manufactured in China and would be available to T2W in China by the end of January 2008.
99 The trial judge held that Mr Rafferty’s oral evidence made it clear that Mr Rafferty understood that, in making the representations regarding the availability of prototypes, Mr Rafferty understood Mr Donovan to be referring to the mining or BMA prototype: see Rafferty v Time 2000 at [205]. In substance, the trial judge found that, in making these two representations, Mr Donovan was in fact referring to the mining or BMA prototype and not to a tourism prototype, and that Mr Rafferty understood this.
100 With respect to the Rafferty parties’ 52 claim against the Donovan parties, major issues at trial were causation and reliance: see Rafferty v Time 2000 at [199]. Mr Rafferty’s evidence (which his Honour accepted) was that he would not have entered into the HOA, the JVSA or the RA “had he been told there was no prototype in China and no manufacturer under contract to make a prototype or production models” or, put another way, “if he had known that there was no current agreement with a manufacturer able to provide the products in a timely fashion”. See Rafferty v Time 2000 at [129], [132], [199]. Mr Rafferty’s evidence was (and the trial judge accepted) that the representation as to there being a contracted manufacturer was critical to his assessment of the viability of the business.
101 The trial judge found (at [204]) that the representations about the manufacturer and the availability of prototypes, even though they were to be mining prototypes, materially contributed to Mr Rafferty’s decision to enter into the various agreements. In this context, his Honour said (at [203]) that:
Viewed objectively, the statements about the mining prototypes mean that the project involving the manufacture and construction of MAUs had moved from the concept stage or plans and drawings stage to the development stage. That would be important to an investor. ... Furthermore, the statements mean that there would soon be a model of the MAUs which could be displayed and shown to potential customers, even though those persons were in the market for MAUs suitable for tourist accommodation. ... I am satisfied that Mr Donovan made the representations with a view to inducing Mr Rafferty to enter into the agreements.
102 His Honour specifically noted (at [205]-[210]) that he made his ultimate finding as to material contribution, having taken into account that: (1) Mr Rafferty’s evidence was “given after the event, and by an interested party”; (2) the prototype representations were not about the tourism prototype referred to in the agreements and the subject of the discussions mentioned in the evidence of Mr Levy and Ms Harris; (3) Mr Rafferty’s enthusiasm for the project; (4) the Donovan parties’ claims that the representations were “mere puffery”; (5) the alleged effect of a 15 December 2007 email; and (6) there was a failure to prove all the pleaded representations. His Honour said (at [210]) that “Mr Rafferty gave clear evidence of the effect of the manufacturer representation, the first mining prototype representation and the second mining prototype representation on his decision to enter the agreements”.
103 The trial judge found that Mr Donovan’s conduct, which was taken to be the conduct of Embleton and T2SA, was misleading or deceptive. Further, the trial judge held (at [211]) that:
Although T2SA was not incorporated until 4 October 2007, upon its incorporation it came under an obligation to correct the representations. The misleading or deceptive conduct is a continuing course of conduct and there is a duty to correct it.
Mr Donovan was, so his Honour held, a person involved in the contravention under s 75B(1) of the TPA.
104 His Honour found, moreover, that the Rafferty parties would not have entered into the three agreements but for the conduct in contravention of s 52 of the TPA; and that, accordingly, they were entitled to relief under s 87(1) against T2SA, Embleton and Mr Donovan. In his Honour’s view, T2OA was a proper party for the purposes of the proposed orders. See Rafferty v Time 2000 at [213].
Rafferty parties v Donovan parties: contravention of the Franchising Code claim upheld
105 The trial judge also upheld the Rafferty parties’ claim that the Donovan parties had contravened the Franchising Code. His Honour held (at [267]) that the HOA was an agreement to enter into a franchise agreement (within the meaning of the Code). According to his Honour, under the HOA, “Embleton was the franchisor and Mr Donovan was likely a participant in the franchise as a franchisor”. T2W or Mr Rafferty or both were prospective franchisees. His Honour also held (at [267]) that the RA was a franchise agreement (within the meaning of the Code), pursuant to which T2SA was the franchisor. T2W, Santora and Mr Rafferty were the franchisees. Accordingly, the failure to give the documents referred to in cl 10, or to receive the documents referred to in cl 11, as the Franchising Code required, constituted a contravention of the Franchising Code and a breach of s 51AD of the TPA.
106 The trial judge rejected various arguments designed to establish that the Franchising Code did not apply to the HOA and the RA, including that:
(1) T2W could not be a franchisee or a prospective franchisee under the HOA because the HOA was made before T2W was incorporated. See Rafferty v Time 2000 at [227].
(2) The HOA was not an agreement to enter into a franchise agreement because T2W was not bound under the HOA to enter into the RA (assuming the RA was a franchise agreement). See Rafferty v Time 2000 at [228]-[233].
(3) The effect of cl 5(3)(a) of the Franchising Code was that Embleton was not bound by the obligations in the Franchising Code. See Rafferty v Time 2000 at [234]-[237].
(4) Neither the HOA nor the RA was a franchise agreement within cl 4 of the Franchising Code. See Rafferty v Time 2000 at [238]-[267].
107 Both at trial and on appeal, the parties focussed on this last-mentioned argument. In concluding that the HOA and the RA fell within the Code, his Honour reasoned, first, that, in the circumstances of the case, whether or not the Code applied depended on the construction and application to the facts of cl 4(1)(b). Secondly, he considered that the actual details of the alleged system or marketing plan need not be set out in the relevant agreement. His Honour stated (at [241]) that:
It will be sufficient for the purposes of clause 4(1)(b) that there be a power in the agreement which is said to be a franchise to impose, “a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor”.
Thirdly, his Honour identified 13 factors that he considered indicative of a system or marketing plan and that were present in the provisions of the HOA and the RA: see Rafferty v Time 2000 at [250]-[261]. His Honour concluded (at [263]-[267]):
[W]hen regard is had to the factors I have identified and the provisions of the agreements, the HOA and the RA involve a grant of the right to carry on the business of offering, supplying or distributing goods in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor.
...
The right to carry on the business must be “under” the relevant type of system or marketing plan. That requirement is satisfied in this case bearing in mind the terms of the HOA and RA.
...
In my opinion, the HOA was an agreement to enter into a franchise agreement and the RA was a franchise agreement under the Franchising Code. Under the HOA, Embleton was the franchisor and Mr Donovan was likely a participant in the franchise as a franchisor. Under the RA, T2SA was the franchisor. In my opinion, Embleton and T2SA have contravened s 51AD of the TPA. However, Mr Donovan is only liable if he was involved in the contravention within s 75B(1) of the TPA. I do not think he is liable because I do not think he had the required knowledge and I refer to my discussion in the context of the applicants’ claim against Madgwicks under s 75B(1) of the TPA.
108 The trial judge rejected the Donovan parties’ and Madgwicks’ submission that, even if the franchisees had been given a disclosure document as the Franchising Code required, Mr Rafferty would not have sought legal advice or would have proceeded with the venture despite any such legal advice. His Honour held (at [269]) that:
Mr Rafferty was aware of the terms of the agreements; in fact he made suggestions for various changes. Mr Rafferty was aware of what Mr Cosoff and Mr Marryat considered to be the uncommercial or disadvantageous aspects of the HOA. Mr Rafferty was aware that he could seek legal advice. These matters are no doubt true and have considerable force when coupled with Mr Rafferty’s obvious enthusiasm for the venture and the caution required in relation to the evidence of a person as to what they would otherwise have done. However, I am satisfied on the evidence that had the Franchising Code been complied with, Mr Rafferty would have sought legal advice. I am satisfied that the legal advice he would have obtained would have been not to enter into the HOA and that he would have accepted the advice. I agree with counsel for the applicants that it is one thing to know an agreement contains a particular provision; it is another to have that matter emphasised and expanded upon by advisers you trust.
109 Accordingly, his Honour found that the Rafferty parties were entitled to relief under s 87 of the TPA on the separate and independent ground that there was a contravention of s 51AD by virtue of the contravention of the Franchising Code.
T2SO’s cross-claim against Mr Rafferty
110 The parties agreed that T2SO’s cross-claim against Mr Rafferty had to be dismissed if the Rafferty parties succeeded against the Donovan parties: see Rafferty v Time 2000 at [272].
The Rafferty parties’ claim against Madgwicks
111 The Rafferty parties’ case against Madgwicks was that, by not advising them that the HOA and the RA constituted franchise agreements, Madgwicks represented to them that arrangements under the agreements did not constitute franchise agreements; and that, by reason of Madgwicks’ conduct, they acted to their detriment. They alleged that (1) Madgwicks engaged in misleading or deceptive conduct (within s 9 of the FTA); and/or (2) Madgwicks was involved (within s 75B of the TPA) in the contravention of s 51AD by the Donovan parties.
112 In Rafferty v Time 2000 at [278]-[283], the trial judge summarised the facts relevant to this claim as follows:
At all times, Madgwicks acted for the Donovan respondents in relation to their dealings with the applicants and, in the course of acting for the Donovan respondents, Madgwicks provided to Mr Rafferty, on behalf of the applicants, each of the HOA, the JVSA and the RA. In the course of acting for the Donovan respondents, Madgwicks received into their trust account two amounts paid under the agreements, namely, the sum of $200,000 paid under the HOA, and the sum of $1,000,000 paid under the RA. Those moneys were disbursed by Madgwicks in the manner indicated ...
In the course of acting for the Donovan respondents, Mr Levy attended one meeting at which Mr Rafferty was present, namely, the meeting at the offices of Deloitte on 27 September 2007, and Ms Harris attended two meetings at which Mr Rafferty was present, namely, the meeting at the offices of Deloitte on 27 September 2007 and a meeting, again at the offices of Deloitte, on 18 October 2007.
I accept Mr Rafferty’s evidence that at a very early stage and before any discussion of the detailed terms of the HOA, somebody asked him whether he wanted to seek legal advice and that he said “we haven’t got that far yet”. That would not have been someone from Madgwicks, as Madgwicks were not involved at that very early stage.
I also accept Mr Levy’s evidence that on 25 September 2007 Mr Rafferty said he would bring a solicitor to the meeting to be held on 27 September 2007. As it happened he did not do that. Mr Rafferty reviewed the various agreements and made suggestions as to alterations. He asked that a copy of the HOA be sent to his accountants. He at no time sought advice on any matter from Madgwicks.
Madgwicks dealt with Mr Rafferty directly. They did not deal with any solicitors or other advisers acting on his behalf. ... Mr Rafferty and Santora acknowledged in clause 37 of the JVSA executed on or about 23 November 2007 that they had had the opportunity to seek legal advice in respect of the terms and conditions of the agreement and, further, they acknowledged and confirmed that they had read and understood the terms and conditions of the agreement. Mr Rafferty’s belief was that Madgwicks were competent solicitors acting on behalf of the Donovan respondents.
Madgwicks had legal and professional obligations by reason of their retainer with the Donovan respondents.
113 After considering the authorities and, in particular as to when silence may constitute misleading or deceptive conduct, the trial judge determined that the Rafferty parties failed in their claim against Madgwicks under s 9 of the FTA. His Honour said (at [301]-[302]):
I have considered the facts carefully, and I do not think there is any evidence to support the suggestion that Mr Rafferty had a reasonable expectation that Madgwicks would advise him that (as I have held) the agreements constituted a “franchise agreement” and a “franchise system” within the Franchising Code of Conduct. The fact that Madgwicks owed a duty of confidence to the Donovan respondents and that any non-disclosure by them was not deliberate supports that conclusion.
114 The trial judge also dismissed the Rafferty parties’ claim that Madgwicks was involved (within the meaning of s 75B(1) of the TPA) in the contravention of s 51AD by the Donovan parties. Madgwicks’ case at trial was that they were not liable under s 75B(1) because they did not have the required level of knowledge: see Rafferty v Time 2000 at [324]. His Honour accepted this proposition, stating as follows (at [334]-[335]):
In my opinion, in this case the essential matters which constitute or make up the contravention of s 51AD of the TPA are as follows:
1. a corporation;
2. the corporation acting in trade or commerce;
3. the three agreements and the terms and conditions of those agreements;
4. the Franchising Code applies to or in relation to the agreements; and
5. the provisions of the Franchising Code were not complied with.
Madgwicks had knowledge of the matters referred to in paragraphs 1, 2, 3 and 5, but ... not of the matter in paragraph 4. In those circumstances, they do not have the required knowledge for the purposes of s 75B(1). ...
Accordingly, the Rafferty parties’ claims against Madgwicks failed.
The Donovan parties’ claims against Madgwicks
115 In a cross-claim against Madgwicks, the Donovan parties claimed that Madgwicks acted in breach of the firm’s contract of retainer in that Madgwicks failed to advise them “as to the consequences of it being held that the agreements involved a franchise agreement” (emphasis added). As the trial judge observed (at [340]) “the complaint about the work carried out and advice provided by Madgwicks [was] quite specific”. Further:
The Donovan [parties] plead[ed] that had they been advised “as to the consequences to [them] should it subsequently be found that the Agreements constituted a Franchise Agreement” then they would have complied with the Franchising Code or they would have structured the transaction and the agreements such that they did not contravene the Franchising Code.
See Rafferty v Time 2000 at [341].
116 The trial judge rejected the Donovan parties’ claim against Madgwicks based on an alleged breach of retainer, first, because he accepted the evidence of Mr Levy and Ms Harris that in fact they did advise Mr Donovan of the consequences of the Franchising Code applying to the agreements in question. His Honour said (at [343]) that:
[T]he evidence of both Mr Levy and Ms Harris was that they did advise Mr Donovan of the consequences of the Franchising Code applying to the agreements and, in particular, that the “deal” would be set aside. That evidence was not contradicted by Mr Donovan. I see no reason not to accept it and the breaches of retainer alleged by the Donovan respondents are not made out.
117 Secondly, his Honour noted (at [344]) that there was no evidence that Mr Donovan would have acted differently had he been advised of the consequences of the Franchising Code applying to the agreements.
118 His Honour rejected a submission made by counsel for the Donovan parties in closing address that “Madgwicks were obliged to advise the Donovan [parties] on the RA and that the firm should have advised [them] that the RA was a franchise agreement and of the requirements in the Franchising Code” on the ground that this was “not the case which is pleaded against Madgwicks and it is not a case that ... should be entertained at this stage having regard to the way in which the trial was conducted”. See Rafferty v Time 2000 at [341].
119 The trial judge also rejected the Donovan parties’ claim that, if they were liable to the Rafferty parties for contravening s 51AD of the TPA (as his Honour found), then Madgwicks was involved in the contravention within s 75B(1) of the TPA. His Honour rejected this claim, first, because the Donovan parties were the primary contraveners: see Rafferty v Time 2000 at [348]. The TPA did not enable the primary contravener to make what was in effect a claim for contribution or indemnity against another person allegedly involved in the primary contravention. Secondly, his Honour rejected the claim for the same reasons he rejected the Rafferty parties’ claim against Madgwicks based on s 75B(1) of the TPA.
The trial judge’s disposition of the case
120 By reason of the Donovan parties’ breaches of ss 51AD and 52 of the TPA, pursuant to s 87(1) and (2) of the TPA, the trial judge, amongst other things, set aside the HOA, the JVSA and the RA and ordered that T2W, T2SA, Embleton and Mr Donovan jointly and severally pay $200,000 to Mr Rafferty and $1.5 million to Karaville. His Honour elaborated on the bases for making these orders in another set of reasons: see Rafferty v Time 2000 West Pty Limited (No 5) [2010] FCA 873 (“Rafferty v Time 2000 (No 5)”). We refer to these reasons below.
the issues arising on The Appeals
121 The main issues in the Donovan appeal were:
(1) whether the trial judge erred in finding that the Franchising Code applied to the HOA and the RA;
(2) whether the trial judge erred in finding that the Rafferty parties had made out their TPA claim of misleading or deceptive conduct against the Donovan parties;
(3) whether the trial judge erred in holding that s 87 of the TPA enabled him to make an order for the repayment of moneys by the appellants (and T2W) jointly and severally; and
(4) whether the trial judge erred in finding that the appellants had not established a breach of retainer on Madgwick’s part. (This last-mentioned issue will be discussed with the main issues arising on the Rafferty appeal.)
122 In their notice of appeal, the Donovan parties raised a further ground as to whether the trial judge erred in finding that, had there been compliance with the Code, the Rafferty parties would not have entered the joint venture. The Donovan parties did not pursue this ground on the hearing of the appeal, in either written or oral submissions. In their notice of contention, the Rafferty parties raised various other issues, which, if addressed at all, were addressed in the course of argument on the principal issues. There is no need to discuss them otherwise than in the course of discussing the main issues. Also in an amended notice of contention in the Donovan appeal, Madgwicks raised an issue as to the absence of loss and damage if there were any breach of retainer. Since, for the reasons set out below, there is no error shown in his Honour’s finding that no breach of retainer was established and, indeed, the matter was scarcely argued, it is unnecessary to consider this issue.
123 On the Rafferty appeal, the main issues were:
(1) whether the trial judge erred in finding that Madgwicks was not liable as a person involved in the contravention of s 51AD (under s 75B(1)) because the firm did not have the requisite knowledge of the essential elements of the contravention; and
(2) whether the trial judge erred in finding that the Rafferty parties had not made out their FTA claim of misleading or deceptive conduct against Madgwicks.
124 In an amended notice of contention in the Rafferty appeal, Madgwicks also raised a further issue as to whether the nature and extent of Madgwick’s participation in any contravention of s 51AD of the TPA was such as to fall within s 75B(1) of the TPA. Since, for the reasons stated, no error is shown in his Honour’s finding that Madgwicks did not have the requisite knowledge to fall within s 75B(1), it is unnecessary to consider this issue.
A: THE Donovan PARTIES’ APPEAL (save for the breach of retainer issue)
The application of the Franchising Code to the HOA and the RA
125 The Donovan parties and Madgwicks contended that the trial judge erred in holding that the Franchising Code applied to the HOA and the RA, and in holding that Embleton and T2SA contravened s 51AD of the TPA by virtue of their non-compliance with the Code.
126 In this section of our reasons, we consider the application of the Code to the HOA and the RA.
127 At the relevant time, s 51AD of the TPA provided that “[a] corporation must not, in trade or commerce, contravene an applicable industry code”. The Franchising Code is contained in a Schedule to the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) (“the Franchising Code Regulations”). The Franchising Code is an applicable industry code. The Code is mandatory and regulates the conduct of corporations entering franchise agreements on or after 1 October 1998: see s 51ACA, s 51AE and the Franchising Code Regulations.
128 As the trial judge noted, the Court is concerned with the Franchising Code as in force immediately before the amendments effected by the Trade Practices (Industry Codes – Franchising) Amendment Regulations 2007 (No 1). The Code was amended over the relevant period but the provisions with which these appeals are concerned remained the same. The dispute about the application of the Code to the HOA and the RA must be resolved by construing these provisions and applying them to the relevant agreements.
129 The prohibition in s 51AD as applied to the Franchising Code is directed to securing compliance by franchisors with the requirements of the Code: see Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 (“Ketchell”) at 109 [18]. The Franchising Code Regulations and the Code itself must be construed with this mind. To adopt what was said by the Court in Ketchell at 110 [21]:
In the Explanatory Statement with respect to the [Franchising Code Regulations], it was said that the operation of the franchising sector had been of concern to the Government for many years. The sector was characterised by high levels of dispute, generally arising out of the imbalance of power between franchisors and franchisees. Major problems in the sector included inadequate disclosures by franchisors prior to franchise agreements being entered into.
130 The stated purpose of the Franchising Code is “to regulate the conduct of participants in franchising towards other participants in franchising”: cl 2. This was expanded upon by the High Court in Ketchell (at 111-112 [25]):
The purposes of the scheme of Pt IVB and the Code … are to regulate the conduct of persons in the franchising industry in order to improve business practices, to provide some protection to franchisees proposing to enter into franchise agreements and to decrease litigation. Those purposes are sought to be achieved, in large part, by ensuring that a prospective franchisee is in a position to make an informed decision about the operation of the franchise and is encouraged to take independent advice before entering into a franchise agreement.
131 Clauses 6, 6B, 10, 11 and 13 (all in Divisions 2.1) of the Franchising Code create obligations and rights relevant to these appeals. These clauses read as follows:
6 Franchisor must maintain a disclosure document
(1) A franchisor must, before entering into a franchise agreement, and within 3 months after the end of each financial year after entering into a franchise agreement, create a document (a disclosure document) for the franchise in accordance with this Division.
(2) A disclosure document:
(a) must be:
(i) if the franchised business has an expected annual turnover of $50 000 or more — in accordance with Annexure 1; or
(ii) if the franchised business has an expected annual turnover of less than $50 000 — in accordance with Annexure 1 or 2; and
(b) may include additional information under the heading ‘Other relevant disclosure information’; and
(c) must be signed by a director or an executive officer of the franchisor.
…
6B Requirement to give disclosure document
(1) A franchisor must give a current disclosure document to:
(a) a prospective franchisee; or
(b) a franchisee proposing to renew or extend a franchise agreement.
(2) If a subfranchisor proposes to grant a subfranchise to a prospective subfranchisee:
(a) the franchisor and the subfranchisor must:
(i) give separate disclosure documents, in relation to the master franchise and the subfranchise respectively, to the prospective subfranchisee; or
(ii) give to the prospective subfranchisee a joint disclosure document that addresses the respective obligations of the franchisor and the subfranchisor; and
(b) the subfranchisor must comply with the requirements imposed on a franchisor by this Part.
Note A subfranchisor is also sometimes referred to as a master franchisee: see subclause 3(1).
…
10 Franchisor obligations
A franchisor must give a copy of this code and a disclosure document:
(a) to a prospective franchisee at least 14 days before the prospective franchisee:
(i) enters into a franchise agreement or an agreement to enter into a franchise agreement; or
(ii) makes a non-refundable payment (whether of money or of other valuable consideration) to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement; or
(b) to a franchisee at least 14 days before renewal or extension of the franchise agreement.
Note Subsection 9 (1) of the Electronic Transactions Act 1999 provides that a requirement under a law of the Commonwealth to give information in writing is satisfied by giving the information electronically if it is reasonable to expect that the information will be readily accessible so as to be useable for subsequent reference, and the person to whom the information is given consents to it being provided electronically.
11 Advice before entering into franchise agreement
(1) The franchisor must not:
(a) enter into, renew or extend a franchise agreement; or
(b) enter into an agreement to enter into, renew or extend a franchise agreement; or
(c) receive a non-refundable payment (whether of money or of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement;
unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this code.
(2) Before a franchise agreement is entered into, the franchisor must have received from the prospective franchisee:
(a) signed statements, that the prospective franchisee has been given advice about the proposed franchise agreement or franchised business, by any of:
(i) an independent legal adviser;
(ii) an independent business adviser:
(iii) an independent accountant; or
(b) for each kind of statement not received under paragraph (a), a signed statement by the prospective franchisee that the prospective franchisee:
(i) has been given that kind of advice about the proposed franchise agreement or franchised business; or
(ii) has been told that that kind of advice should be sought but has decided not to seek it.
(3) Subclause (2):
(a) does not apply to the renewal or extension of a franchise agreement with a franchisor; and
(b) does not prevent the franchisor from requiring any or all of the statements mentioned in paragraph (2) (a).
…
13 Cooling off period
(1) A franchisee may terminate an agreement (being either a franchise agreement or an agreement to enter into a franchise agreement) within 7 days after the earlier of:
(a) entering into the agreement; or
(b) making any payment (whether of money or of other valuable consideration) under the agreement.
(2) Subclause (1) does not apply to the renewal, extension or transfer of an existing franchise agreement.
(3) If the franchisee terminates an agreement under subclause (1), the franchisor must, within 14 days, return all payments (whether of money or of other valuable consideration) made by the franchisee to the franchisor under the agreement.
(4) However, the franchisor may deduct from the amount paid under subclause (3) the franchisor’s reasonable expenses if the expenses or their method of calculation have been set out in the agreement.
132 As the trial judge noted, the expected turnover of the joint venture was in excess of $50,000. If the Franchising Code applied to the agreements in question, then the franchisor was required to have prepared a disclosure document in accordance with Annexure 1 (cl 6). The purpose of a disclosure document (as stated in cl 6A) was:
(a) to give to a prospective franchisee, or a franchisee proposing to enter into, renew or extend a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise; and
(b) to give a franchisee current information from the franchisor that is material to the running of the franchised business.
To this end, the disclosure document was required to include a recommendation that the franchisee or prospective franchisee obtain independent legal, accounting and business advice before entering the franchise agreement (cl 6(2), Annexure 1).
133 The franchisor was required to give the disclosure document and a copy of the Code to any prospective franchisee 14 days before the franchisee entered a franchise agreement or an agreement to enter a franchise agreement (cl 10(a)(i)). The Rafferty parties also referred to the provisions as to a non-refundable payment: see, e.g., cl 10(a)(ii) and cl 11(1)(c) above. As will appear hereafter, it is unnecessary to deal with their submissions in so far as they relied on these provisions.
134 The franchisor was not to enter a franchise agreement, or an agreement to enter a franchise agreement, unless the franchisor received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Code (cl 11(1)). Further, before a franchise agreement was made, the franchisor was required to receive from the prospective franchisee a signed statement that the prospective franchisee has been given advice by an independent lawyer, business advisor or accountant about the proposed franchise agreement or business, or has been told that that kind of advice should be sought, but had decided not to seek it (cl 11(2)(a) and (b)). The Code also made provision for a seven-day cooling off period (cl 13).
135 It was not disputed that the Rafferty parties had not been provided with a copy of the Code and the disclosure document referred to in cl 10, or the written statements referred to in cl 11(1) and 11(2) before the HOA or the RA were executed. If the HOA and the RA were an agreement to enter a franchise agreement and a franchise agreement as the trial judge found, then the franchisor had contravened the Code and, thereby, s 51AD of the TPA.
136 The Rafferty parties sought to uphold the trial judge’s findings that the HOA was an agreement to enter into a franchise agreement and that the RA was a franchise agreement. The Donovan parties and Madgwicks contended that his Honour was in error.
The Application of the Franchising Code to the HOA
137 Whether or not a proposed agreement is a franchise agreement, or an agreement to enter into a franchise agreement, is to be assessed at the time when the parties enter the agreement. This is clear from the terms of the Code: see, for example, cl 10 and cl 11; also Australian Competition and Consumer Commission v Kyloe Pty Ltd [2007] FCA 1522 (“Kyloe”) at [56] per Tracey J. We commence (as did the parties) with the HOA.
1. Was T2W a party to the HOA?
138 The first submission made by the Donovan parties and Madgwicks was that the HOA was not an agreement between Embleton and T2W to enter into a franchise agreement because T2W was not a party to the HOA and therefore did not agree to enter into a franchise agreement.
139 T2W was plainly not a party to the HOA at the time it was made. Indeed, when Mr Rafferty signed the HOA, T2W had not been incorporated. Rather, the HOA contemplated that T2W would be incorporated to “establish[] the venture business to market, sell and install [MAUs] in the Industry Markets within the Territory”: cl 7. The HOA provided that the venture was to be subject to further definition in what was to become the JVSA (cl 5.1) and contemplated that T2W and Embleton would enter into a “Rights Agreement as contemplated by clause 8” – anticipating what was to become the RA (cl 5.2).
140 A pre-incorporation contract may bind a company in the circumstances set out in s 131 of the Corporations Act 2001 (Cth), a provision referred to by the trial judge and in argument to support the proposition that T2W was bound by the HOA and had therefore agreed to enter into it. Section 131(1) relevantly provides:
If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract:
(a) within the time agreed to by the parties to the contract; or
(b) if there is no agreed time – within a reasonable time after the contract is entered into.
141 The trial judge apparently took the view that cl 2 and cl 7 of the HOA placed obligations on T2W and that it became bound by them on its incorporation by virtue of s 131. His Honour did not elaborate on this proposition further. The Donovan parties argued on appeal that there was no evidence that anyone had entered into, or purported to enter into, the HOA on behalf on T2W, or for its benefit, and there was no evidence of ratification. For the reasons stated below, we reject this proposition.
142 It must be inferred from the circumstances attending the HOA that, at the time the HOA was entered into, Mr Donovan (and possibly T2SA) and Mr Rafferty were seeking to contract on behalf of, or for the benefit of, T2W. The HOA was, as the Donovan parties said, essentially between the promoters of T2W – Mr Donovan (and his company, T2SA) and Mr Rafferty. By entering into the HOA, they made a pre-incorporation agreement imposing rights and obligations on the company to be formed pursuant to the HOA. Obligations were imposed on the new company by cl 2 and cl 7 and rights arose by virtue of cl 5.2 and cl 6.3. These rights and obligations were central to the creation of the joint venture. Furthermore, Mr Donovan and Mr Rafferty were, under the HOA, to hold the shares in and constitute the directors of the new company. Had they been asked, at the time they entered the HOA, whether they were intending to contract on behalf of, or for the benefit of, the company to be formed (which became T2W), there can be little doubt that they would have answered affirmatively. The HOA and the circumstances in which it was made leads to the conclusion that they sought to enter the HOA on this basis. The circumstances of this case are very different from the situation in Scuderi v Morris (2001) 39 ACSR 592; [2001] VSCA 190 at [81]-[84], where the other party had no knowledge of any intention to create a pre-incorporation contract.
143 Ratification for the purposes of s 131 may be express or implied: see Aztech Science v Atlanta Aerospace (Woy Woy) [2005] NSWCA 319 at [81]-[83], [86]-[90] per Basten JA (Handley JA agreeing). Whilst the matter is not entirely free from doubt, in the circumstances of the case, T2W should be taken to have impliedly ratified the HOA for the purposes of s 131 by the company subsequently entering into the JVSA and the RA as contemplated by the HOA. This proposition is justified by the fact that Mr Donovan and Mr Rafferty were not only parties to the HOA but were together the guiding mind of T2W on its incorporation.
144 Accordingly, T2W was bound by the HOA and entered into an agreement to enter into a franchise agreement (assuming that the HOA is properly so described).
2. Was Mr Rafferty a “prospective franchisee” under the HOA?
145 At trial the Rafferty parties argued and the trial judge accepted that, by virtue of the extended definitions of “franchisee” and “franchise” in the Code, Mr Rafferty was also a “prospective franchisee” who entered into an agreement to enter a franchise agreement (again assuming that the HOA is properly so described). On appeal, the Donovan parties and Madgwicks submitted that Mr Rafferty could not be a prospective “franchisee” because that definition assumed an existing franchise.
146 It is not necessary to rely upon the extended definitions of “franchisee”, “franchise” and “interest in a franchise” in cl 3 of the Code to conclude that Mr Rafferty was a prospective franchisee for the purposes of the Code. This is because under the Code, a prospective franchisee is not simply a “franchisee” with a prospective interest in the franchise. Instead, a “prospective franchisee” is defined differently and separately in cl 3 of the Code as a “person who deals with a franchisor for the right to be granted a franchise”. This distinct definition makes sense in light of the fact that it is meant to capture persons who are considering the purchase of or participation in a franchise, but who have not yet been granted or become involved in a franchise (that is, who are not yet actual franchisees). In the present case, Mr Rafferty was a person who dealt with a franchisor (Embleton) for the right to be granted the franchise (assuming, as we hold, that the agreement contemplated by cl 8.2 was a franchise agreement). On this construction, Mr Rafferty is properly regarded as a prospective franchisee.
147 Although we have demonstrated that a “prospective franchisee” does not require a franchise to be in existence, there is no equivalent definition of a “prospective franchisor”, and the definition of “prospective franchisee” includes a reference to a franchisor. This makes it necessary to ask whether a franchise must formally be in existence in order for a franchisor to exist for the purpose of the definition of a “prospective franchisee”. It is true enough that the definition of “franchisor” is in the present tense and, absent a contra-indication, would ordinarily be thought to apply with respect to that which already exists. We are, however, concerned with construing provisions of the Code that seek to protect “prospective franchisees” – persons who have not yet been granted a franchise but wish to be granted one. It is not unreasonable to suppose that there may be instances in which prospective franchisees are considering participating in a start up franchise. Contrary to the submissions of counsel, in light of the remedial purpose of the Code, it is not to be supposed that the Code, and in particular clauses such as cl 10 and cl 11, would be limited to protecting prospective franchisees who are contemplating participating in existing franchises, but would not protect prospective franchisees who are contemplating becoming involved in start up franchises, from which franchisees may arguably require even more protection. We would thus conclude that it was not necessary for the franchise to be in existence in order for Embleton to constitute the franchisor. Mr Rafferty falls within the definition of “prospective franchisee” and was therefore a prospective franchisee for the purposes of the relevant transactions.
3. Was the HOA sufficiently certain so as to constitute an agreement to enter into a franchise agreement?
148 The third principal submission made by the Donovan parties and Madgwicks was that the HOA did not comprise an agreement to enter into a franchise agreement, with the result that cl 10 and cl 11 did not apply. The Franchising Code does not define the expression “agreement to enter into a franchise agreement”. Senior counsel for the Donovan parties argued that, in order to constitute an “agreement to enter into a franchise agreement”, the terms of the franchise agreement must be agreed. If this were so, then, so the argument ran, there was no agreement to enter into a franchise agreement because the most that could be said was that, in the event Embleton was asked by T2W to do so, Embleton (the putative franchisor) agreed by virtue of cl 5.2 and cl 8.2(a) to grant “the Rights” to T2W. The content of “the Rights” was, so it was said, obscure (see the interaction of the definition of “the Rights” in cl 1.1 and cl 8.2(a)) and simply provided for the exclusive use of certain intellectual property.
149 We would also reject this argument. Clauses 10 and 11 of the Code place obligations on a franchisor before entering a franchise agreement and an agreement to enter a franchise agreement. There would be little point in providing for obligations before entering into an agreement to enter into a franchise agreement if the terms of the franchise agreement had to be settled first before an agreement to enter into a franchise agreement could exist at all. Further, if there needed to be the certainty contended for, then cl 10 and cl 11 of the Code could be readily avoided. We would not construe the expression “agreement to enter a franchise agreement” in this way. The Code, and the Franchising Code Regulations and the provisions of the TPA under which they are made, are remedial and intended to be protective of prospective franchisees. The relevant provisions are to be construed broadly to afford “the fullest relief which the fair meaning of [their] language will allow”: see Bull v Attorney-General (NSW) (1913) 17 CLR 370 at 384 per Isaacs J, quoted with approval in Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32 at 44 per Mason CJ; Webb Distributors (Aust) Pty Ltd v Victoria (1973) 179 CLR 15 at 41 per McHugh J; Marks v GIO Australia Holdings Limited (1998) 196 CLR 494 at 528 per Gummow J; and IW v City of Perth (1997) 191 CLR 1 at 12 per Brennan and McHugh J, 39 per Gummow J. Accordingly we would hold that all that is required is that there be discernible an agreement to enter a franchise agreement, without any necessity that the precise terms of that franchise agreement be settled.
4. Was the HOA exempted from the operation of the Code by cl 5(3)(a)?
150 The fourth argument of the Donovan parties and Madgwicks was that cl 5(3)(a) of the Code applied in the case of an agreement by Embleton to enter into a franchise agreement. This provision read as follows:
(3) However, this code does not apply to a franchise agreement:
(a) if the franchisor:
(i) is resident, domiciled or incorporated outside Australia; and
(ii) grants only 1 franchise or master franchise to be operated in Australia …
(On the appeal, there was no submission to the effect that cl 5(3) was irrelevant because it only applied to a franchise agreement and not an agreement to enter into a franchise agreement).
151 Embleton was incorporated in Hong Kong and thus satisfied cl 5(3)(a)(i). The clause focuses on the franchisor and not the franchise agreement. As the trial judge noted, if the focus was on the franchise agreement, then clause 5(3)(a)(ii) would have virtually no work to do because most franchise agreements grant only one franchise.
152 Clause 5(3)(a)(ii) might be construed as operating only where the franchisor grants the one franchise to be operated in Australia, in the sense that the franchise is to be for the whole of Australia. This would require a strained reading of the words “to be operated in Australia”. The clause could readily have been drafted in different terms to achieve this outcome more clearly if this was the intended result. The alternative construction is that favoured by the trial judge. This would construe cl 5(3)(a)(ii) as applicable where it is clear from the attendant circumstances that, at the time the franchise agreement is made, the franchisor intended to grant only one franchise to be operated in Australia, in the sense of within Australia. That is, the clause would capture a franchise, even for part of Australia, provided that the franchisor intended only to grant the one franchise to be operated in Australia. We too prefer this construction because, whilst faithful to the language of the provision, it accords the clause as a whole an operation that apparently serves a rational end. It was presumably thought that, in the circumstances in which cl 5(3)(a) would apply, the franchisee’s business operation was likely to be more substantial and less in need of protection than in other cases.
153 In the present case, the terms of the HOA indicated that the franchisor had it in mind to grant more than one franchise agreement in Australia: see the HOA, cl 8.2 (last two lines); see also the RA, cl 2(b). Accordingly, we agree with the trial judge that cl 5(3)(a) did not operate to exclude Embleton from the terms of the Code. Clause 5(3)(a) has no relevance to the RA because, by the time of the RA, T2SA was the franchisor and it was incorporated in Victoria.
5. Did the HOA create a legal obligation?
154 The fifth argument advanced by the Donovan parties and Madgwicks was that there was no agreement to enter into a franchise agreement, either because the HOA did not create a legal obligation to enter into a franchise agreement (assuming that to be the correct characterisation of the Rights Agreement contemplated by cl 8.2) or because the Rights Agreement contemplated by cl 8.2 was not a franchise agreement. We address first the proposition that there was no agreement to enter into a franchise agreement because there was no binding obligation to do so.
155 The HOA itself was an enforceable agreement, which gave rise to binding obligations: see, e.g., cl 2 and cl 4. The present argument turned on cl 5.2 and cl 8. The Donovan parties and Madgwicks impugned his Honour’s proposition that, by reason of cl 5.2, T2W acquired an option to enter the Rights Agreement. We do not, however, consider that anything much turns on whether or not his Honour was correct to describe what T2W acquired as an option. This is because cl 5.2 provided, in effect, that if T2W requested Embleton to enter into a Rights Agreement as contemplated by cl 8, then the parties (Embleton, T2SA, Mr Donovan and Mr Rafferty) would use reasonable endeavours to ensure that the Rights Agreement was concluded by 1 December 2007. A best endeavours clause of this kind created a contractual duty in which, in the event that T2W made the request, Embleton was required to apply itself to enter in the contemplated Rights Agreement to the extent that it was reasonable to do so in the circumstances. See, in this regard, Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at 378-379 per Dixon J; Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83 at 101 per Mason J; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 64 per Gibbs CJ, 143-144 per Dawson J; and Valentine Films Pty Limited v Trimex Pty Ltd [1996] FCA 124 per Merkel J.
156 Hence, the HOA plainly contemplated an arrangement whereby, at T2W’s request, Embleton would enter into the Rights Agreement. The trial judge found that it was “practically certain that the option would be exercised because Mr Donovan controlled T2W”: see Rafferty v Time 2000 at [282]. We understand his Honour simply to mean that, having regard to the principal object of the joint venture, as a matter of fact (as opposed to legal obligation) it was virtually inconceivable that T2W would not request Embleton to enter into the Rights Agreement, as envisaged by cl 5.2. There was no challenge to his Honour’s finding in this regard. Indeed, as Mr Donovan’s solicitors noted in their letter of 1 October 2007, “the whole purpose of establishing [T2W] is to enter into the Rights Agreement”. In these circumstances, we agree with his Honour that there was an agreement to enter into a franchise agreement. The language of the Code does not require the concept of an agreement to enter a franchise agreement be limited to cases in which there is a legal obligation to enter a franchise agreement; and to exclude from its protection a case such as this where it was practically certain that a prospective franchisee would act under a legally enforceable agreement to invoke a contractual duty to cause a prospective franchisor to enter into a franchise agreement. As already stated, the authorities are clear that, wherever possible, remedial and protective provisions such as in cl 10 and cl 11 of the Code should be construed so as to afford the fullest relief. Further, the construction advocated by the Donovan parties would permit the strictures of the Code to be avoided with ease.
6. Was the RA as contemplated by the HOA and the RA a franchise agreement?
157 The penultimate question with respect to the HOA is whether the Rights Agreement contemplated by cl 8 of the HOA was a franchise agreement within the meaning of cl 4 of the Code. The same question arises with respect to the RA: that is, whether the RA was a franchise agreement within the meaning of cl 4 of the Code. Broadly speaking, the Donovan parties and Madgwicks made the same arguments with respect to the HOA and RA. It is convenient to discuss at the same time arguments about the nature of the Rights Agreement contemplated by cl 8 of the HOA and the RA.
158 The Donovan parties and Madgwicks did not argue that the Rights Agreement in cl 8 of the HOA and the RA did not satisfy the elements of the definition of franchise agreement in cl 4(1)(a), (c) and (d). This was consistent with their approach at trial: see Rafferty v Time 2000 at [239]. Rather, on appeal as at trial, the parties focussed on cl 4(1)(b). The critical question was, whether or not under Rights Agreement contemplated by cl 8 of the HOA and the RA, the putative franchisor gave the putative franchisee the right to carry on the business of supplying goods in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor. If they did, then the Rights Agreement contemplated in cl 8 of the HOA and the RA were franchise agreements, within the meaning of the Code.
159 At the relevant time, cl 4 of the Code provided that:
(1) A franchise agreement is an agreement:
(a) that takes the form, in whole or part, of any of the following:
(i) a written agreement;
(ii) an oral agreement;
(iii) an implied agreement; and
(b) in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and
(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:
(i) owned, used or licensed by the franchisor or an associate of the franchisor; or
(ii) specified by the franchisor or an associate of the franchisor; and
(d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:
(i) an initial capital investment fee; or
(ii) a payment for goods and services; or
(iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or
(iv) a training fee or training school fee …
The remainder of the definition is not relevant for this aspect of the argument.
160 The gravamen of the argument for the Donovan parties and Madgwicks was that the Rights Agreement contemplated by cl 8 of the HOA and the RA did not meet the criteria for a franchise agreement because pursuant to them: (1) Embleton was to do no more than, and T2SA did no more than, grant the right to use intellectual property; and (2) Embleton was not to, and T2SA did not, grant “the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor”. That is, the criterion in cl 4(1)(b) of the Code’s definition of “franchise agreement” was not met. On the contrary, any obligation to create a system or a marketing plan lay, under both the agreement contemplated by the HOA and the RA, with T2W. These parties contended that a policies and procedures provision, such as that in cl 8.2(d)(xv) of the HOA, was merely a generic provision that could not be construed inconsistently with the specific imposition of obligations on T2W.
161 In order to assess these arguments, it is necessary to construe and apply cl 4(1)(b) of the Code to the agreement contemplated in cl 8 of the HOA and the RA. There are three distinct elements of cl 4(1)(b). That is, to satisfy cl 4(1)(b), there must be: (1) a person (the franchisor) who grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia; (2) under a system or marketing plan; (3) substantially determined, controlled or suggested by the franchisor (or an associate). We consider below each of these elements by reference to the agreement contemplated by the HOA and the RA.
a. The franchisor and the franchisee
162 It is first necessary to establish the identity of the franchisor (or franchisors) and franchisee (or franchisees) within the RA. Under cl 8 of the HOA, Embleton was to grant the relevant rights to T2W and was therefore to be the franchisor (assuming the agreement contemplated by cl 8 was a franchise agreement: see below). We have already identified T2W and Mr Rafferty as prospective franchisees under the HOA. Under the RA, T2SA (through Embleton) granted the relevant rights to T2W and was the franchisor (also assuming this agreement was a franchise agreement: see below). With respect to the RA, however, the question whether Santora, Karaville and Mr Rafferty were franchisees for its purposes is more complicated. We deal with Santora first, and Karaville and Mr Rafferty second.
163 The Code defines (in cl 3) a “franchisee” as “a person to whom a franchise is granted”. Santora was not the corporate vehicle to whom the franchise was granted. The Code (in cl 3) further provides that a “franchise” is to include “an interest in a franchise”; and this latter expression is defined (in cl 3) to include “a legal or beneficial interest in … shares or voting rights in a corporation … that owns a franchised business”. As Santora held 1,700,000 shares in T2W, Santora was a franchisee for the purposes of the Code.
164 We turn to consider whether Mr Rafferty and Karaville were franchisees under the Code. Mr Rafferty was a director of and, with his wife, held all shares in Karaville. As noted above, Karaville was the sole shareholder of Santora, which in turn owned 49% of the shares in T2W. Mr Rafferty and Karaville were accordingly not franchisees in the same sense as T2W or Santora. By virtue of cl 3, however, the Code extends the definition of “franchisee” beyond a person “to whom a franchise is granted” to include a person “who otherwise participates in a franchise as a franchisee”. This extends the protection of the Code beyond persons who are the direct franchisees or shareholders of such franchisees, to a person who participates in some other way in a franchise as a franchisee. Whether or not a person is properly so described is a question of fact, to be answered by reference to the facts and circumstances of the particular case. In the present case, Karaville was the sole shareholder of Santora and, through this connection, was a corporate person otherwise participating in the relevant franchise as a franchisee. Karaville was therefore a franchisee. Following on from this, Mr Rafferty was the natural person who in substance and in fact stood behind Santora and Karaville and was in substance and in fact thereby participating in the franchise as a franchisee. See, e.g., Rafferty v Time 2000 at [63], [44], [61], [102], [225]. Pursuing a similar analysis, Mr Donovan would be a franchisor (as defined in cl 3) because, by virtue of his sole directorship of T2SA, he “otherwise participates in a franchise as a franchisor”. These conclusions are confirmed by the remedial purpose of the Code, the Franchising Regulations and the provisions of the TPA under which they are made: see [149] above.
165 We mention (if only to put aside) an alternative basis upon which Mr Rafferty might be regarded as a person who otherwise participates in a franchise as a franchisee. That is, it might be said that Mr Rafferty participated in the franchise as a franchisee (assuming the RA is a franchise) by virtue of the fact that he was one of the two directors of the company (T2W) that was granted the franchise. If this were so, however, then Mr Donovan would be both a franchisor and a franchisee, since Mr Donovan was the other director of T2W. We consider that this result indicates that, in the circumstances of this case, to focus on the directorship of T2W, which was, after all, the joint venture vehicle, is less helpful than examining the substance of the relevant connections.
b. The RA and agreement contemplated in cl 8 of the HOA were not limited to the grant of IP rights
166 As to the right to carry on the business of offering, supplying or distributing goods or services in Australia mentioned in cl 4(1)(b), the Donovan parties submitted that the RA, and the agreement contemplated by cl 8 of the HOA, were limited to the grant of intellectual property rights. We reject this submission.
167 By cl 2(a) of the RA, T2SA granted T2W the “Licence” (as defined) for the “Term” (as defined), on the terms and conditions stated. The Licence was defined in cl 1.1 of the RA as “the exclusive right granted to T2W by T2SA to”:
(a) design MAUs (for the purpose given in (c))
(b) arrange manufacture and importation of MAUs (for the purpose given in (c)); and
(c) promote, market, sell and install MAUs within the Industry Markets in the Territory during the Term
168 The definition of the Licence in cl 1.1 distinguished between the design, manufacture and importation of MAUs on the one hand; and, on the other, the overarching business purpose of promoting, marketing, selling and installing MAUs. The significant point in the present context was this overarching purpose, which was to be carried out within (amongst others) the tourism sector in Western Australia and the Northern Territory (cl 1.1). The grant of intellectual property rights by T2SA to T2W was only for the purpose, or as a part, of the business of marketing and selling MAUs under the Licence. This is confirmed by cl 3(a) of the RA, pursuant to which T2W was permitted to use “the Core IP” (as defined) for the purpose of the Licence and not for any other purpose; and by cl 2(a), which stated that “[f]or the purpose of giving effect to this Licence T2W will be entitled to use the Core IP and any relevant Developed IP.”
169 The agreement contemplated by cl 8 of the HOA was not relevantly different. Recital C stated that T2SA and what was to become Santora “propose[d] to enter into a venture together to market, sell and install [MAUs] in Western Australia and the Northern Territory” for tourism (amongst other things). The HOA provided for the creation of a joint venture vehicle (i.e., T2W) “for establishing the joint venture business to market, sell and install [MAUs] in the Industry Markets within the Territory”: see cl 7, cl 4.1 and cl 5.2. The provisions of cl 8 (d)(ii)-(xx) and cl 8(e), (f) and (g) emphasis that Embleton’s proposed grant of intellectual property rights was to be as a part of the promotion of the business of the joint venture in marketing and selling MAUs.
170 Accordingly, we reject the submission that either the RA or the agreement contemplated in cl 8 of the HOA should be characterised as solely or principally concerned with the grant of intellectual property rights. Under the HOA there was to be, and the RA there was, a grant by one person to another of the right to carry on the business of offering, supplying or distributing goods (MAUs) or services (the installation of MAUs) in Australia.
171 We turn to the second and third elements of cl 4(1)(b) of the Code. The Code does not define the expression “system or marketing plan”. In ordinary English usage, the expression would signify a co-ordinated method or procedure, or scheme whereby goods or services are sold. This is apparently the sense in which the expression in used in the Code. Further guidance can be obtained from cases in the United States of America, where there is similar, although not identical, legislation: see Capital Networks Pty Ltd v .au Domain Administration Limited [2004] FCA 808 (“Capital Networks”) at [101]-[119], where Bennett J set out the results of her research. See also Kyloe at [40] where Tracey J sets out a list of factors derived in part from Capital Networks. We are indebted to their Honours for their research and analysis, which forms the basis of the following discussion.
172 Broadly speaking, although much depends on the circumstances of the case, these cases indicate that the following factors may be indicative of a system or marketing plan: specific requirements for accounting and record keeping; reservation by the franchisor of a right to audit the books of account and other records; inability of the franchisee to supply goods or services to customers without the franchisor’s approval; reservation by the franchisor of the right to approve promotional and advertising material; provision by the franchisor of bonus structures or equivalent for those selling its goods or services; provision by the franchisor of training for staff selling its goods or services; stipulation of retail pricing structures, sales structures, sales quotas and the like; creation of marketing and sales territories; reservation by the franchisor of the right to approve sales staff; reporting systems in relation to profit or turnover; restriction on the franchisee selling competing products; controls on the use of brand and trading names; requirements for signage and merchandising; management structure; and badging requirements (mandatory use of trading name, uniforms, stationery, etcetera).
173 In the ordinary course, whether a system or marketing plan is “substantially determined, controlled or suggested by the franchisor” is closely related to whether there is a scheme or marketing plan at all. Matters relevant to determination, control or suggestion may include: the extent to which the franchisee’s business involves the sale of the franchisor’s goods and services; the degree to which the franchisor assumes responsibility for some centralised management and for uniform standards regarding quality; whether or not the franchisor places the franchisee under an obligation with respect to advertising and promotional campaigns; and the extent to which the franchisor controls the franchisee’s business, having regard to advertising and financial support, auditing of books, inspection of premises, hiring of staff, sales quotas, management training and the like.
174 When considered in this way the trial judge did not err in finding that, under the RA, the franchisor (T2SA) gave the franchisee the right to carry on the business of supplying goods or services under a system or marketing plan substantially determined, controlled or suggested by it. Similarly, his Honour did not err in finding that, under the agreement contemplated in cl 8 of the HOA, the prospective franchisor (Embleton) proposed to give the right to carry on the business of supplying goods or services under a system or marketing plan substantially determined, controlled or suggested by it. We set out below those factors that justify this conclusion.
175 Specific requirements for accounting and record keeping. The prospective franchisee (in the HOA at cl 8.2(d)(xx)) and the franchisee (in the RA at cl 13.1(e)) were required to prepare and maintain financial records with Deloitte’s assistance on a management system approved by the franchisor.
176 Right to audit the financial records of the franchisee. In both cases, the franchisor reserved the right to have access to (and thereby audit) the financial records of the prospective franchisee (in the HOA at cl 8.2(d)(xx)) and the franchisee (in the RA at cl 13.1(e)).
177 Inability of the franchisee to supply goods or services to customers without the franchisor’s approval. In both cases, the franchisor was to have an absolute discretion to scrutinise proposed sales orders of MAUs on a project by project basis and to approve or refuse any project. See HOA, cl 8.2(c) and RA, cl 9.3.
178 Reservation by the franchisor of the right to approve promotional and advertising material. Under the RA, the franchisee was obliged to comply with all reasonable directions of the franchisor as to quality control in marketing of MAUs. See RA, cl 13.1(f). The HOA contemplated similar terms: see HOA, cl 8.2(d)(ii), (iii); cl 8.2(xv).
179 Badging – trademarks, trade and brand names. Under the RA, T2W was obliged “if, and as required by T2SA” to give prominence “to trade marks and trade and brand names associated with the Core IP and Time 2000 Image in all displays and catalogues and other promotional material”: see RA, cl 9.1(a). The HOA contemplated these terms: see HOA, cl 8.2(d)(ii), (iii). There was a prohibition on the use of “Core IP” outside the Industry Markets or the Territory: see RA, cl 3(a), cl 9.1.
180 Requirements for merchandising and employment of sales staff. Under the RA, the franchisee was required to establish “display unit(s) and employ sales persons as reasonably required by the franchisor from time to time to fulfil its obligations under” the RA: RA, cl 9.1(c). The HOA contemplated the same obligation: see HOA, cl 8.2(d)(xiii).
181 Stipulation of retail pricing structures, sales structures, sales quotas. Under the RA, the franchisee was required to meet specific sales targets; and the franchisor was entitled to terminate the RA in the event that the targets were not achieved in the circumstances specified: see RA, cl 10.3, HOA, cl 8(2)(e). The HOA contemplated similar provisions: see HOA, 8.2(d)(xix).
182 Creation of marketing and sales territories. The RA granted the franchisee the exclusive right to “promote, market, sell and install” MAUs within certain markets in a stipulated territory – Western Australia and the Northern Territory: see RA, cl 1.1 and cl 3(a). The HOA contemplated the same markets and sales territory: see HOA, Recital C, cl 1,1, cl 7, cl 4.1 and 5.2.
183 Restriction on the franchisee selling competing products. The RA contained a non-competition clause: see RA, cl 13.2.
184 Requirement to comply with the franchisor’s policies and procedures. Under the RA, the franchisee was obliged to “comply with the policies and procedures as required by T2SA from time to time”: see RA, cl 13.1(a). The HOA contemplated the same term: see HOA, 8.2(d)(xv).
185 The Donovan parties and Madgwicks challenged the trial judge’s reliance on the “policies and procedures” provisions, arguing that these provisions were merely generic provisions that could not support his Honour’s finding that cl 4(1)(b) of the Code was satisfied. We reject this submission. A policies and procedures provision must be read in light of the whole of the contract in which it is found. When this is done, it is clear that the provision in the RA (and the agreement contemplated by cl 8 of the HOA) would enable parts of a system or marketing plan to be imposed by the franchisor, in the case of the RA, on the franchisee and, in the case of the HOA, on the prospective franchisee. This construction is confirmed by the fact that the overarching purpose of the RA and the agreement contemplated in cl 8 of the HOA was the marketing, sale and installation of MAUs; and the various provisions to which we have already referred related to this marketing, sale and installation. We agree with the trial judge that, in order to meet this requirement in cl 4(1)(b) of the Code, it is not necessary for the details of a system or marketing plan to be set out in the franchise agreement. It is enough that the agreement creates rights and obligations that would enable the franchisor substantially to determine, control or suggest that the business be conducted under a system or marketing plan. The RA satisfies this description. In the case of an agreement to enter a franchise agreement, it is sufficient that the court can discern that it has been agreed that there be an agreement that will create rights and obligations of this nature, even though the terms of the franchise agreement are yet to be settled. The HOA satisfies this description.
d. Franchisor’s control over franchisee
186 The requisite element of control or suggestion is clear enough. First, the business of the franchisee (T2W) or the prospective franchisee was solely concerned with MAU’s – the franchisor’s product. Second, the franchisor had a critical degree of control over key aspects of the franchisee’s business, including with respect to financial records, sales orders and prospective customers, and merchandising. Further, the policy and procedures provisions enabled the franchisor to control other key aspects, such as advertising and promotion, staff training and the like. Third, the franchisor placed the franchisee, or prospective franchisee, under obligations to meet specific sales targets and performance indicators, and to give prominence “to trade marks and trade and brand names” in all displays and catalogues and other promotional material”. See above. These obligations were capable of being augmented under the policy and procedures provisions. Fourth, the franchisor assumed some responsibility for centralised control over, for example, the quality control in marketing. The policy and procedures provisions would have supported further centralisation.
187 We conclude that the RA and the agreement contemplated in cl 8 of the HOA involved the grant of a right to carry on the business of supplying goods or services under a system or marketing plan; and that this was, or was to be, substantially determined, controlled or suggested by the franchisor.
188 For the reasons stated, we reject the Donovan parties’ contention that the Franchising Code did not apply to the RA and the agreement contemplated in cl 8 of the HOA.
Conclusion with respect to Franchising Code
189 Since none of the Rafferty parties were provided with a copy of the Code and the disclosure document in accordance with cl 10, or the written statements in accordance with cl 11(1) and 11(2) before they entered into the HOA or the RA, it follows that Embleton and T2SA contravened the Franchising Code and s 51AD of the TPA. The two companies were liable as primary contraveners.
190 It is unnecessary to consider a further argument advanced on appeal but not at trial that the payment of $200,000 to T2W was a non-refundable payment within the meaning of cl 10(a)(ii) and cl 11(1)(c).
The case of misleading and deceptive conduct as against the Donovan parties
191 The Donovan parties contended that the trial judge erred in finding that the Rafferty parties had made out a case of misleading and deceptive conduct against them. In particular, the Donovan parties contended that the trial judge erred with respect to the representations he found were made, and reliance and inducement. They also contended that his Honour erred in respect of the relief he granted.
192 In the following section of our reasons, we consider these contentions. Since both this limb of the Donovan appeal, as well as the Rafferty appeal involved an attack on the findings of fact made by the trial judge, it is important to bear in mind the nature of an appeal in this Court.
193 An appeal in this Court is an appeal by way of rehearing: see Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 (“Branir”) at 434-435 [20]. Fox v Percy (2003) 214 CLR 118 at 124-129 [20]-[31], 138-139 [65]-[67] establishes that, in an appeal of this kind, the fact that a trial judge’s decision is partly based on the credibility of witnesses does not relieve an appellate court from its appellate functions. Nonetheless, in such a case, allowance must be made for the fact that the trial judge has advantages not shared by the appellate court. As the joint judgment stated (at 125-126 [23]):
On the one hand, the appellate court is obliged to “give the judgment which in its opinion ought to have been given in the first instance”. On the other, it must, of necessity, observe the “natural limitations” that exist in the case of any appellate court proceeding wholly or substantially on the record. These limitations include the disadvantage that the appellate court has when compared with the trial judge in respect of the evaluation of witnesses’ credibility and of the “feeling” of a case which an appellate court, reading the transcript, cannot always fully share. Furthermore, the appellate court does not typically get taken to, or read, all of the evidence taken at the trial. Commonly, the trial judge therefore has advantages that derive from the obligation at trial to receive and consider the entirety of the evidence and the opportunity, normally over a longer interval, to reflect upon that evidence and to draw conclusions from it, viewed as a whole. (Citations omitted)
194 Thus, on an appeal, this Court will not interfere with a factual finding based on the credit of a witness unless the trial judge’s finding is “glaringly improbable” or cannot rationally be reconciled with incontrovertible facts, uncontested testimony or compelling inferences: see Yousif v Commonwealth of Australia (2010) 193 IR 212 at 221 [33].
195 Leaving aside the particular considerations regarding factual findings based on credit, whilst the appellate court must make up its own mind on the facts, the court does not proceed as if it were trying the case at first instance. There is a need for the appellant to show error on the appeal, since the task of the appellate court is to correct such error. In order to determine whether or not there is error, the appellate court must take into account and weigh the advantages held by the trial judge. As Branir recognised at 437 [28]:
The advantages of the trial judge may be more subtle and imprecise, yet real, not giving rise to a protection of the nature accorded credibility findings, but, nevertheless, being highly relevant to the assessment of the weight to be accorded the views of the trial judge. … [I]f a choice arises between conclusions equally open and finely balanced and where there is, or can be, no preponderance of view, the conclusion of error is not necessarily arrived at merely because of a preference of view of the appeal court for some fact or facts contrary to the view reached by the trial judge.
196 At the relevant time, s 52 of the TPA prohibited a corporation from engaging in conduct in trade and commerce that is misleading or deceptive, or that is likely to mislead or deceive. The words “engage in conduct” included the making of representations about a past, present or future matter. It was not in issue that, for the purposes of the TPA, the relevant Donovan corporations were engaged in trade and commerce.
197 In order to make out their case under s 52 of the TPA (or s 9 of the FTA: see below), the Rafferty parties needed to establish (1) that the conduct of which they complained occurred; (2) that, viewed objectively (and subject to s 51A of the TPA, which was pleaded in this case), the conduct was misleading or deceptive; and (3) that they relied on the impugned conduct in the sense that it operated as an inducement for them to do something that occasioned them damage.
198 The case pleaded at trial was set out in part at par [38F] of the Rafferty parties’ Further Amended Statement of Claim. The paragraph relevantly reads as follows:
Further, Donovan in his own right, and T2S[A], T2O, Embleton and each of them by their officer Donovan, represented to Rafferty:
…
2. that they, or one or more of them, had entered into a contract with a company in China known possibly as ‘Duowei’ or ‘CIMC’ for it to manufacture modular building units in China;
Particulars
2.1 Conversation between Rafferty and Donovan in Melbourne in about June 2007
2.2 Email dated 15 December 2007 from Donovan to ‘Chris’ at Idle Architects, a copy of which was provided to Rafferty on the same date.
3. that a prototype modular building unit ... was being manufactured in China and would be available to T2W in China before Christmas 2007;
Particulars
3.1 Conversation between Rafferty and Donovan in Melbourne in about June 2007.
3.2 Email dated 21 July 2007 from Angus Koch sent on the authority of second and fifth respondents to Rafferty
3.3 Terms of the Heads of Agreement, clause 8.2
4. that a prototype modular building unit ... was ... being manufactured in China and would be available to T2W in China by the end of January 2008;
Particulars
4.1 The applicants repeat the particulars to paragraph 38F.3 above.
4.2 Conversation between Rafferty and Donovan in Melbourne on about 19 November 2007 in which Donovan said that the prototype would now be available to T2W by the end of January 2008
...
199 The Rafferty parties pleaded that these representations were incorrect and, therefore, misleading or deceptive, or likely to mislead or deceive. Further, they alleged that, relying on the representations, they had entered into the HOA, JVSA and RA and paid moneys under them. They further pleaded that they “would not have entered into the Agreements … and paid the said sums totalling $1.7 million but for the misrepresentations”. We have not set out the first pleaded representation because his Honour found (at [200]) that, by the end of the case [this] representation had “receded into the background” and, on appeal, there was no serious challenge to this finding.
200 First, as to the representations, the Donovan parties challenged the basis of his Honour’s finding concerning the representation as to the existence of a contract with a Chinese manufacturer to make the units in China (“the manufacture representation”). The Donovan parties submitted that: (1) on its face, the pleaded representation related to production units as opposed to prototype units; (2) the evidence to which his Honour referred as justifying his finding about this representation referred only to the manufacture of prototypes; and (3) in Mr Rafferty’s evidence about the Melbourne meetings in which the representation was allegedly made Mr Rafferty did not say that Mr Donovan said anything about a contract to manufacture production units.
201 We do not accept the Donovan parties’ submissions as to the manufacture representation. The pleading was not on its face limited to production as opposed to prototype units. It was open to the trial judge to find as he did, having regard to Mr Rafferty’s evidence, which his Honour summarised. This is set out at [19]-[23] above.
202 Secondly, the Donovan parties challenged the basis of Honour’s finding concerning the two representations as to the manufacture and availability of prototypes – in the June 2007 representation, before Christmas 2007, and in the November 2007 representation, by the end of January 2008 (“the prototype representations”). The Donovan parties submitted that the trial judge erred in finding that the prototype representations related to a mining prototype rather than a tourism prototype.
203 The parties agreed that, up to trial, the Rafferty parties’ pleading as to the prototype representations related to tourist accommodation. The trial judge accepted, however, that, by the end of the trial, the prototype representations referred to a prototype for mining accommodation and not for tourist accommodation: see Rafferty v Time 2000 at [195]. The history of the litigation shows that his Honour was correct to do so.
204 Mr Rafferty’s affidavits filed before the trial were unclear at a number of points about whether a tourism or a mining prototype was the subject of Mr Donovan’s representations. Indeed, the trial judge specifically noted that there was this confusion: see Rafferty v Time 2000 at [205]. When Mr Rafferty’s affidavits are read as a whole, they do not establish that Mr Rafferty thought that the prototype that Mr Donovan was obtaining was a tourism prototype. Nor do they make it clear that the subject was a mining prototype. Mr Rafferty’s affidavits leave the position uncertain.
205 At trial, the trial judge gave the Rafferty parties leave to lead further evidence in chief from Mr Rafferty. His Honour also gave them leave to amend their Statement of Claim to reflect Mr Rafferty’s oral evidence, and the trial was conducted on the basis of the pleading set out above.
206 In oral evidence in chief, Mr Rafferty said that Mr Donovan’s reference to prototypes being under manufacture and available by Christmas 2007 (and later in January 2008) was to mining (or BMA) prototypes. Mr Rafferty augmented this evidence in cross-examination. It seems that he was not seriously challenged on his evidence that the relevant representations related to a mining prototype.
207 It has to be borne in mind that the representations on which the Rafferty parties relied were essentially oral representations said to have been corroborated by documentary evidence and evidence of Mr Donovan’s conduct. If Mr Donovan had given evidence at the trial, the issue would presumably have required the trial judge to determine whether he accepted Mr Donovan’s or Mr Rafferty’s accounts. Mr Donovan did not, however, give evidence, although he was available to do so. See [97] above. This meant that the issue fell to be determined by reference to Mr Rafferty’s evidence. As noted above (at [97]), his Honour found that Mr Rafferty was an honest and reliable witness. After carefully considering the evidence of Mrs Donovan (see [16] above), his Honour accepted Mr Rafferty’s evidence and made findings as to the representations in conformity with his evidence: see above at [97] and Rafferty v Time 2000 at [125]. Hence, notwithstanding the confusion in Mr Rafferty’s affidavits, the trial judge found that Mr Donovan was referring to a mining prototype (see above at [99] and Rafferty v Time 2000 at [205]).
208 We do not consider that the Donovan parties have shown any error in the trial judge’s finding on this issue. There was no error shown, and indeed none was suggested, in the trial judge’s assessment of Mr Rafferty’s credibility. The trial judge was evidently cognisant of the matters to which the Donovan parties have directed us: see especially Rafferty v Time 2000 at [205]. The Donovan parties have in effect sought to revisit on the appeal an issue at trial. His Honour had the advantage of hearing the witnesses, being taken to all the evidence, and seeing the whole trial unfold. Having regard to the matters to which we have referred, some of which related to the history of the litigation, the last-mentioned matter was particularly important. Notwithstanding the confusion in the Rafferty parties’ case prior to trial, we consider that it was open to the trial judge to find that the representations as pleaded related to a mining prototype and that these representations were made.
209 The Donovan parties challenged the trial judge’s finding that Mr Rafferty relied on Mr Donovan’s manufacture and prototype representations in entering the HOA, the JVSA and the RA and that these representations materially contributed to his decision to enter these agreements.
210 Mr Rafferty was asked in evidence in chief:
[I]f Mr Donovan had told you in the course of negotiations in the period for say May 2007 up to the execution of the rights agreement and even up to the time of the payment of $500,000 on 23 January 2008, that there was no prototype in manufacture in China, and that there was no manufacturer under contract to make a prototype or production models, what would your reaction have been?
Mr Rafferty answered “I wouldn’t have invested the money”.
211 At trial and on appeal, the Donovan parties challenged the effect of this evidence, on the basis of Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 (“Campbell v Backoffice”) at 353 [146]-[147]. In the present case, however, the premises upon which Mr Rafferty gave evidence have been established – i.e, the manufacture and the prototype representations have been established. In this circumstance, Campbell v Backoffice has no application.
212 As the trial judge recognised, the evidence of Mr Rafferty’s conduct supported the inference that he had entered the agreements and paid money under them in reliance on the manufacture and the prototype representations. This is reflected in his Honour’s reference (in Rafferty v Time 2000 at [202]) to Gould v Vaggelas (1985) 157 CLR 215 at 236, where Wilson J stated the applicable principles, including that:
If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference that he was induced to do so by the representation.
213 This inference was strongly supported, so the trial judge said, by sound commercial considerations: see Rafferty v Time 2000 at [203]. The Donovan parties did not assail this part of his Honour’s reasons.
214 The trial judge considered various countervailing considerations before concluding that the representations materially contributed to Mr Rafferty’s decision to enter into the agreements, some of which were agitated again on the appeal. We discern no error in his Honour’s consideration of these considerations. On appeal, the Donovan parties specifically referred to an email of 21 July 2007 that Mr Rafferty received from Mr Koch with an attached feasibility study. It does not seem to us, however, that the email and the lengthy attachment about the possibility of an elaborate scheme for a prototype mining village necessarily militated against reliance on Mr Rafferty’s part on the straightforward representations that Mr Donovan had made. The Donovan parties also argued that, in effect, later representations as to a tourism prototype (also unfulfilled) overtook the earlier representations as to a mining prototype. We do not consider that this was necessarily the case. It was open for the trial judge to conclude that the representation as to a tourism prototype was in addition to, but not in substitution for, the earlier prototype representations.
215 For these reasons, we discern no error in his Honour’s findings as to inducement and reliance.
Mr Donovan’s conduct taken to be conduct by Embleton and T2SA
216 The Donovan parties further submitted that the trial judge erred in finding that Mr Donovan’s conduct was taken to be conduct by Embleton and T2SA by virtue of s 84(2) of the TPA. They accepted that the manufacture and the prototype representations were made on his own behalf and on behalf of the Time 2000 companies, but argued that they could not have been made on behalf of Embleton or T2SA, because neither Embleton nor T2SA (which was not incorporated until 4 October 2007) was relevant before 5 October 2007 (or thereabouts), when the HOA was entered into by Embleton, T2SA and the other parties.
217 At the relevant time s 84(2) of the TPA provided that “[a]ny conduct engaged in on behalf of a body corporate”:
(a) by a director, employee or agent of the body corporate within the scope of the person’s actual or apparent authority; or
(b) by any other person at the direction or with the consent or agreement (whether express or implied) of a director, employee or agent of the body corporate, where the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, employee or agent;
shall be deemed, for the purposes of [the TPA], to have engaged in also by the body corporate.
218 Mr Donovan was the director of T2SA and, through Almere Limited, also in control of Embleton. Prima facie, s 84(2) operated to make his conduct the conduct of T2SA (pursuant to s 84(2)(a)) and Embleton (pursuant to s 84(2(b)).
219 As the Rafferty parties submitted (and we accept) the only inference open on the evidence and the facts as found was that Mr Donovan was the sole natural person who stood behind, acted for and controlled both T2SA and Embleton. Further, the only apparent purpose of the relevant representations was to persuade Mr Rafferty to invest in the joint venture, which involved acting under licence from Embleton directly, or through T2SA, to use Embleton’s intellectual property, and for which Embleton and/or T2SA were to be paid. We conclude therefore that the manufacture and the prototype representations were made to benefit not only Mr Donovan but also Embleton and T2SA; and that the trial judge did not err in finding that Mr Donovan’s conduct was taken to be the conduct of Embleton and T2SA.
220 The Donovan parties apparently accepted that, if the Court were against them with regard to these submissions, then it was open to the trial judge to find that, upon its incorporation, T2SA came under an obligation to correct the misrepresentation: see Rafferty v Time 2000 at [211].
221 For the reasons stated above, we reject the Donovan parties’ contention that the trial judge erred in finding that the Rafferty parties had made out a case of misleading and deceptive conduct pursuant to s 52 of the TPA against the T2SA, Embleton and Mr Donovan. In conformity with the discussion below, Mr Donovan was clearly a person involved in this contravention of s 52, within the meaning of s 75B(1) of the TPA.
Whether the trial judge erred in holding that s 87 of the TPA would support an order for repayment of moneys by the appellants jointly and severally
222 The thrust of the Donovan parties’ submissions on relief was that the trial judge erred in holding that s 87 of the TPA would support an order for repayment of moneys by the appellants jointly and severally. These submissions turned upon the proper construction of s 87 of the TPA.
223 The Donovan parties submitted that there was no proof of loss or damage, as required by ss 87(1), 87(1A) and (2) of the TPA, to enable any order to be made under these provisions; alternatively, his Honour had no power to set aside the HOA, the JVSA and the RA as between all the parties and to order the repayments to Mr Rafferty and Karaville by T2W, T2SA, Embleton and Mr Donovan (jointly and severally). This was because, so the Donovan parties said, the trial judge had no power under s 87 of the TPA:
in avoiding an agreement to do more than avoid the agreement or the relevant part of the agreement which was the result of the relevant contravention as between the relevant contravener and the relevant other party; and
in ordering a refund of monies paid under an avoided agreement or the relevant part thereof to do no more than order a refund by the relevant contravener to the relevant other party.
The Donovan parties also argued that, even if the trial judge had the power to make the orders he did, he ought not to have done so as a matter of discretion.
224 Section 87 may be engaged in a proceeding such as this. For the provision to be engaged, there must be a finding that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by the conduct of another person engaged in in contravention of a provision of a relevant part of the TPA. A contravention of s 51AD or s 52 is such a contravention. In this circumstance, the Court may make such orders under s 87 as it thinks appropriate against the person who engaged in the conduct, or a person who was involved in the contravention, if the Court considers that the order or orders concerned will compensate in whole or in part for the loss or damage; or prevent or reduce the loss or damage suffered, or likely to be suffered. The orders that may be made include the orders set out in s 87(2). The impugned orders in this case were apparently made under s 87(2)(a) and (c), alternatively, in exercise of the broad power conferred by s 87(1) or (1A).
225 There is therefore no doubt that “[p]roof of loss or damage (actual or potential) is … the gateway to the s 87 remedies”: see Marks v GIO Australia Holdings Limited (1998) 196 CLR 494 (“Marks v GIO”) at 513 [43]; and I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 (“I & L Securities”) at 127. Indeed, the Court can only make orders under s 87 in so far as those orders will compensate, prevent or reduce the loss or damage that has been identified. The Donovan parties’ submission to this effect must be accepted but it does not follow that his Honour erred.
226 The trial judge held, in effect, that the Rafferty parties (in particular, Mr Rafferty) entered into the HOA acting under the influence of the manufacture and the prototype representations, as well as on account of the failure to comply with cl 10 and cl 11 of the Franchising Code. His Honour further held, in effect, that, by virtue of entering into the HOA, the Rafferty parties made various payments and entered into the JVSA and the RA. These payments totalled $1.7 million. His Honour found that the Rafferty parties would not have entered those agreements and made those payments but for the misrepresentations and the non-compliance with the Code. Citing Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 (“Demagogue v Ramensky”), the trial judge treated the disadvantage or detriment suffered by the Rafferty parties as being bound by these agreements and having made the payments under or in relation to them. See Rafferty v Time 2000 (No 5) at [12].
227 In Demagogue v Ramensky a Full Court of this Court held (at 33, 43-44, 47) that, in the circumstances of that case, loss and damage arose from entry into a contract as a result of reliance upon conduct contravening s 52 of the TPA. The circumstances of the present case are analogous to those in Demagogue v Ramensky. Accordingly, unless Demagogue v Ramensky has been overruled, we must reject the first submission made by the Donovan parties on the issue of loss and damage.
228 The Donovan parties relied on Marks v GIO to make good their submission that there was in this case no proof of loss and damage sufficient to engage s 87. We do not consider that Marks v GIO has that effect. The situation under consideration was different to the present (and to that in Demagogue v Ramensky). In Marks v GIO the appellant borrowers entered into loan facilities on the basis of representations later found to be wrong. At the trial, no borrower said that, if the true position had been known, the borrower would not have borrowed at all or would have entered into alternative arrangements. The borrowers conceded that, even allowing for the error, the loan facility was more beneficial to them than any other then available. This concession was critical to the outcome of the proceeding because it meant that the borrowers suffered, and would suffer, no loss or damage as a result of the misleading and deceptive conduct of the lenders: see Marks v GIO at 504 [21], 516 [58], 536 [118]-[119]. Accordingly, they failed in their claim for relief under s 87. This was in fact consistent with Demagogue v Ramensky, the observation at 515 [55] being merely confirmatory of the true position. As McHugh, Hayne and Callinan JJ there said (at [55]), “[i]t will be rare that the difference between what was represented and what was given will not be reflected in some difference in value or other manifestation of actual loss to the party that was misled either now or in the future”. Marks v GIO was just such a rare case. The current case is different: Mr Rafferty’s evidence (accepted by the trial judge) was that he would not have entered into the agreements and caused the payments to be made but for the misrepresentations. The evidence at trial and the facts as found showed that the value of what he received was significantly less than that which he believed he was to receive. This detriment was the loss and damage suffered by the Rafferty parties. There is no error shown in his Honour’s approach in this regard.
229 On the finding of misleading and deceptive conduct in contravention of s 52 on the part of Embleton and T2SA, through the involvement of Mr Donovan, it was clearly open to the trial judge to set aside the HOA, the JVSA and the RA, on the basis that, but for that conduct, the Rafferty parties would not have entered into them. Further, for the reasons we are about to state, it was clearly open to his Honour to make an order for the repayment of moneys paid pursuant to those agreements or under the influence of that conduct in order to compensate the Rafferty parties, or reduce their loss and damage.
230 The Donovan parties principally attacked the order for payment of moneys by Embleton and Mr Donovan. The trial judge explained that he made the order because “Embleton and Mr Donovan [were] the true beneficiaries of the moneys”. See Rafferty v Time 2000 (No 5) at [14]. His Honour concluded that the persons who received the moneys were to be taken as Embleton, Mr Donovan, as well as T2SA and T2W (there being no argument on appeal with respect to the latter two). See Rafferty v Time 2000 (No 5) at [14].
231 The basis for his Honour’s conclusion is clear enough when his Honour’s findings are fully considered. The trial judge found that the evidence before the court established that the Donovan companies – Embleton, T2SA and T2OA – and the other companies identified in Rafferty v Times 2000 at [13]-[16] were all companies under Mr Donovan’s control and owned by him. His Honour said that “[t]he evidence consist[ed] not only of the company searches, but also of the evidence of Mr Donovan’s dealings with the applicants and Deloitte, and the evidence given by the witnesses called by Madgwicks”. See Rafferty v Time 2000 (No 5) at [13]. On appeal, the Donovan parties contended that his Honour overstated the effect of the evidence to which he referred. We are not persuaded that he did. Rather, the evidence to which his Honour referred and to which we have been taken on appeal justified his Honour’s findings in this regard.
232 As already noted, the misrepresentations made by Mr Donovan on his own behalf were also taken to be conduct by Embleton and T2SA. This was in substance how the matter had been pleaded by the Rafferty parties: see the Further Amended Statement of Claim [38F]. Indeed, it was Embleton that under the HOA was to take the contemplated benefit of the joint venture arrangement on the Donovan side. This remained the case until Embleton diverted the benefit to T2SA. T2SA then became the entity that, on the Donovan side, was to take the benefit of the joint venture arrangement. Mr Donovan was to take the ultimate benefit because he was in effect the owner of Embleton and T2SA.
233 It is well established that “[s] 87 of the Act confers a wide discretionary power on courts to make remedial orders in appropriate cases to ensure a fair result”: see Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 at 298; also Akron Securities v Iliffe (1997) 41 NSWLR 353 at 364-367; and I & L Securities at 117 [19]. Bearing in mind the facts and circumstances as found in this case, his Honour’s conclusion that an order for payment should be made against Embleton and Mr Donovan was unremarkable: see Rafferty v Time 2000 (No 5) at [17].
234 The Donovan parties submitted that no order should have been made against Mr Donovan. On the evidence and the facts as found, and bearing in mind that Mr Donovan did not give evidence although available to do so, it was open to the trial judge to find that Mr Donovan was in fact a “person who was involved in the contravention” of s 52 of the TPA (within the meaning of s 75B). Indeed, the trial judge so found: see Rafferty v Time 2000 at [211]. The Donovan parties complained that the issue was not raised at trial, although clearly the trial judge believed that it had been.
235 We are not persuaded that his Honour erred in this regard. First, in par 39 of their Further Amended Statement of Claim, the Rafferty parties specifically sought relief against the second to fifth respondents (including Mr Donovan) under s 87(1) and (2) of the TPA, including an order that the money paid by the applicants … in respect of the [HOA], the [JVSA] and the [RA] be repaid …”. The making of such an order necessarily involved a finding that Mr Donovan was a person involved in a relevant contravention of the TPA. See also pars [8.3], [38], [38A], [38F], and [38H] of the Further Amended Statement of Claim. Secondly, Counsel’s Memorandum of Agreed Facts re the s 75B issue, which was filed with leave after the hearing of the appeal, indicates that, in closing address, the Rafferty parties addressed the issue of Mr Donovan’s accessorial liability, though with respect to the contravention of s 51AD and not s 52 of the TPA. Presumably, this was because accessorial liability with respect to the s 52 contravention was virtually unarguable if the Rafferty parties made out their case against Embleton and T2SA as the primary contraveners. In reply, the Donovan parties did not assert that Mr Donovan could not be made liable under s 87 on the basis that s 75B was unavailable in the circumstances of the case. After delivery of reasons for judgment, and before final orders were made, the trial judge heard substantial argument about the orders that should be entered. The Rafferty parties sought orders that Mr Donovan pay an amount of money to the Rafferty parties. The Donovan parties did not submit that an order could not be made against Mr Donovan on the ground that s 75B could not be relied on in the circumstances of the case or that his Honour should recall his reasons published on 13 July 2010 in any respect. It may reasonably be inferred from the circumstances of the case that it would have been evident to the Donovan parties just as it was to his Honour that the accessorial liability of Mr Donovan in respect of the s 52 contravention was a live issue.
236 The Donovan parties’ submission that it was not open to the trial judge to make an order for payment against Mr Donovan should be rejected. In the circumstances of this case, it was open to the trial judge to make orders for repayment against Embleton and Mr Donovan, as well as T2SA and T2W.
237 The Donovan parties have not established that his Honour did not have the power to make the orders that he did. No error is shown in his exercise of discretion. Accordingly, the Donovan parties have not shown that the trial judge erred in holding that s 87 of the TPA would support an order for repayment of moneys by the appellants jointly and severally.
B: The Rafferty parties’ appeal (and the Donovan Parties’ Claim for breach of retainer)
Was there a breach of duty by Madgwicks to the Donovan parties?
238 The issues to which we now turn are those that involve Madgwicks. Issues concerning the firm’s liability arise in both appeals. In the Donovan appeal, the Donovan parties argued that the trial judge erred in failing to find that Madgwicks breached the duty it owed under its retainer. This submission directly challenged the trial judge’s finding that the breaches of retainer alleged by the Donovan parties were not established: Rafferty v Time 2000 at [343]. For the reasons we are about to give, we do not discern any error in his Honour’s finding in this regard.
239 First, the Donovan parties argued that Madgwicks did not discharge their professional duty to the Donovan parties because they did not give them an adequate warning of the consequences, if any, if the agreements were found to be governed by the Franchising Code. Secondly, the Donovan parties argued that the trial judge should have made a finding that Mr Donovan relied on the advice that Madgwicks gave him. Thirdly, the Donovan parties argued that the trial judge erred in declining to entertain a further late submission as to Madgwicks’ breach of retainer.
240 Perusal of the Further Amended Statement of Claim confirms that the alleged breach of retainer related solely to a failure to warn as to the consequences of any agreement being found to be a franchise agreement or an agreement to enter a franchise agreement. The Donovan parties pleaded that, if they had been so warned, then they would have complied with the Code or have structured their arrangements so as not to contravene the Code.
241 As indicated above, the trial judge accepted the evidence of Madgwick’s two witnesses, Mr Levy and Ms Harris. A summary of that evidence as disclosed in his Honour’s reasons is set out at [68]-[84] above. It may be recalled that his Honour referred first to Mr Levy’s evidence, specifically noting that, at a meeting on 27 September 2007, Mr Levy’s evidence was that either he or Ms Harris had said “there was a risk that the proposed transaction would be a franchise and that that would necessitate compliance with the Franchising Code. Mr Levy or Ms Harris said that there were strict compliance requirements including disclosure obligations” ([70] above). The trial judge also referred to Ms Harris’ evidence to the effect that “during the course of the two meetings at Deloitte on 27 September 2007 and 16 October 2007 respectively, [Mr Levy and Ms Harris] said to Mr Donovan that if the agreement required compliance with the Franchising Code and the Code was not complied with then the agreement would not be enforceable and could be set aside”: see Rafferty v Time 2000 at [182]; also ([78] above). This was also corroborated by Mr Levy ([81] above). Mr Levy and Ms Harris were not cross-examined as to the nature of the advice they had been given. There was, moreover, no evidence that Mr Donovan did not understand the possible consequences of unenforceability. The evidence was sufficient (if accepted) to answer the allegation that an insufficient warning had been given. His Honour accepted this evidence, bearing in mind that Mr Donovan did not contradict it, and held that the breaches of retainer were not made out. There is no error shown in his Honour’s findings that the breaches of retainer, as alleged, were not made out.
242 In support of the proposition that the trial judge should have found that Mr Donovan relied on the advice that Madgwicks gave him, the Donovan parties relied on the evidence ([77]) that, on 16 October 2007, when Mr Levy and Ms Harris warned Mr Downes and Mr Donovan about the Code, Mr Downes said, somewhat simplistically, that “we just ensure that we don’t impose a system or marketing plan and therefore avoid satisfying that element of the definition of a franchise”. See Rafferty v Time 2000 at [169]. This evidence will not bear the weight that the Donovan parties seek to place on it. Theirs is a selective choice of an item of evidence taken from a voluminous transcript. It has to be borne in mind that there was no evidence from Mr Donovan that he would have acted differently had he been told what might occur if the Franchising Code applied to any of the agreements. No explanation was offered for the failure to call him; and, as noted above, his Honour observed him present in court during the trial. An unexplained failure to call a witness may in appropriate circumstances lead to an inference that the evidence of that witness would not have assisted that party’s case: see Jones v Dunkel (1959) 101 CLR 298 at 308. Mr Donovan was the key witness on reliance. It would have been open to the trial judge to draw this inference against Mr Donovan. In the circumstances, we do not consider that the Donovan parties can make good their submission that his Honour erred in not making the finding for which they contended.
243 Finally, on this branch of the Donovan appeal, the Donovan parties contended that his Honour fell into error in declining to entertain their submission in closing that Madgwicks were obliged to advise them about the RA and that the firm should have advised them that the RA was a franchise agreement and of the requirements in the Code. Counsel for Madgwicks who had appeared at the trial submitted that there was a sound reason for his Honour’s exercise of discretion, namely, that this was a new matter, which had neither been pleaded nor run at the trial, and that Madgwicks had chosen not to adduce evidence that could have been relevant to this new formulation, because of the way the Donovan parties had conducted their case at the trial. Counsel informed us (and he was not contradicted) that “large parts of Mr Levy’s affidavit were not read” and accompanying exhibits were not relied on because of the way the trial was run.
244 In his reasons, his Honour stated that he would not entertain the Donovan parties’ late submission because it was not the case that the Donovan parties had pleaded against Madgwicks (which was demonstrably correct) and “should not be entertained at this stage having regard to the way in which the trial was conducted”: see Rafferty v Time 2000 at [345]. On a question such as this, his Honour was undoubtedly in the best position to determine whether or not the course of the trial attracted the principles stated in Leotta v Public Transport Commission of New South Wales (1976) 50 ALJR 667 at 668 per Stephen, Mason and Jacobs JJ (and discussed in Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451 at [32]-[59] by Spigelman CJ), so as to warrant entertaining the Donovan parties’ submission in closing. His Honour clearly considered that the trial had been conducted in such a way as to make it unfair to Madgwicks to entertain the Donovan parties’ new submission on breach of retainer. There was nothing shown for us to doubt his Honour’s exercise of discretion.
245 For these reasons, we conclude that his Honour did not err in finding that the breaches of retainer alleged by the Donovan parties were not established.
Whether Madgwicks was involved in the contravention of s 51AD of the TPA
246 Broadly speaking, as noted earlier, the Rafferty appeal raised two questions – the first concerning s 75B of the TPA and the second, s 9 of the FTA. The following paragraphs concern the question whether the trial judge erred in holding that Madgwicks did not have the required knowledge to be involved in the contraventions of s 51AD of the TPA by Embleton and T2SA, by virtue of s 75B of the TPA.
247 The Rafferty parties contended that, in order to establish that Madgwicks fell within s 75B as a person involved in the contraventions of s 51AD, it was not necessary for the Rafferty parties to establish that Madgwicks knew that the Franchising Code applied to or in relation to the RA and the HOA. The Rafferty parties contended, in the alternative, that, in any event, Madgwicks did have sufficient knowledge of this matter for the purposes of s 75B and that his Honour erred in finding to the contrary. Accordingly, the Rafferty parties advanced two bases for their submission that his Honour erred in dismissing their claim against Madgwicks based on s 75B of the TPA. See Rafferty v Time 2000 at [336]. Madgwicks sought to uphold his Honour’s judgment.
248 At the relevant time, s 75B(1) of the TPA provided:
A reference in this Part to a person involved in a contravention of a provision of Part IV, IVA, IVB, V or VC, or of section 95AZN, shall be read as a reference to a person who:
(a) has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.
In their Further Amended Statement of Claim and at trial, the Rafferty parties relied on s 75B(1)(a) and (c).
249 At the outset, it is important to distinguish between the position of a principal contravener and an accessory under s 75B(1)(a) or (c). The relevant distinction is drawn out in the leading case on s 75B, Yorke v Lucas (1985) 158 CLR 661 (“Yorke v Lucas”) at 667-670. In their joint judgment (at 666-667), Mason ACJ and Wilson, Deane and Dawson JJ observed the following in relation to the operation of s 75B(1)(a):
[T]he words … "aided, abetted, counselled or procured", are taken from the criminal law where they are used to designate participation in a crime as a principal in the second degree or as an accessory before the fact. Both in the case of felonies where the principal offender and the secondary participant commit separate offences, and in the case of misdemeanours where no distinction is drawn between the two, a person will be guilty of the offences of aiding and abetting or counselling and procuring the commission of an offence only if he intentionally participates in it. To form the requisite intent he must have knowledge of the essential matters which go to make up the offence whether or not he knows that those matters amount to a crime. (Emphasis added)
250 Their Honours referred to Giorgianni v The Queen (1985) 156 CLR 473 (“Giorgianni”) by way of example, observing:
[T]he appellant had been convicted of culpable driving under s. 52A of the Crimes Act 1900 (N.S.W.) in reliance upon s. 351 of that Act. The latter section provides that a person who aids, abets, counsels or procures the commission of any misdemeanour may be proceeded against as a principal offender and was held to be declaratory of the position at common law. The offence of culpable driving under s. 52A is an offence of strict liability which, putting the defence of honest and reasonable mistake to one side, requires no proof by the prosecutor of any mental state on the part of the accused. Nevertheless it was held that to have aided and abetted or counselled and procured the offence of culpable driving the appellant must have intentionally participated in that offence and to have done so must have had knowledge of the essential matters which went to make up the offence on the occasion in question. Those matters included the defective condition of the brakes upon the vehicle being driven, because the culpable driving alleged consisted of the driving of that vehicle with defective brakes. Proof of such knowledge on the part of the principal offender was, however, not part of the prosecution case because the principal offence was one of strict liability.
251 Similarly in relation to s 75B(1)(c), their Honours held (at 670) that:
There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention.
252 In Yorke v Lucas (at 668) their Honours specifically rejected the submission that the requirement of intent should be discarded in the context of s 75B of the TPA, holding that that there was no reason to dispense with the requirement of intent (and therefore knowledge) simply because of the civil context of s 75B, or because the “application of s 75B may occur in conjunction with a provision such as s 52 [of the TPA], which requires no intent”. Yorke v Lucas thus stands for the proposition that for a person to aid, abet, counsel, procure, or be knowingly concerned in, a relevant contravention under s 75B(1), he or she must have knowledge of the essential elements of the TPA contravention.
253 The essential elements constituting a TPA contravention will necessarily depend upon the terms of the provision that has been contravened. In many cases, the essential elements constituting the contravention in question will be simple matters of fact. For example, in Yorke v Lucas the relevant essential element of a breach of s 52 was the falsity of the representation in question; and in Giorgianni the relevant essential element of the offence of aiding and abetting culpable driving was the defective condition of the brakes.
254 In other cases, as Rural Press Limited v Australian Competition and Consumer Commission (2003) 216 CLR 53 (“Rural Press v ACCC”) illustrates, the terms of a legislative prohibition may mean that the essential elements involve more complex facts. Although this can make the identification of the essential facts less than straightforward, the principles referred to in Yorke v Lucas continue to apply. In Rural Press a newspaper publisher, Bridge Printing Office Pty Ltd (“Bridge”), started circulating a local newspaper in a neighbouring community in competition with that community’s newspaper, which was published by Rural Press Pty Ltd (“Rural Press”). Rural Press threatened to start distributing a newspaper in Bridge’s community unless Bridge ceased distributing its paper in the Rural Press community. Bridge, mindful of Rural Press’ financial strength, ceased to do so. The ACCC subsequently brought an action against Rural Press for contraventions of ss 45 and 46 of the TPA, which, broadly speaking, prohibited (1) the making of arrangements that would have, or be likely to have, the effect of substantially lessening competition in a relevant market, and (2) the having and taking advantage of a substantial degree of power in a market for a proscribed purpose. In determining whether the regional manager and the general manager of Rural Press were “involved” in the corporate contraventions of ss 45 and 46 of the TPA under s 75B(1), the trial judge required the general and regional manager to be aware of each of the relevant essential elements of the offences, but did not require them to have undertaken a more specific analysis in terms of the legislative prohibitions: see Australian Competition and Consumer Commission v Rural Press Limited [2001] FCA 116 at [138]. The High Court later upheld his Honour’s approach. Hence, whilst the identification of the elements of a contravention requires careful legal analysis, “[i]n order to know the essential facts, and thus satisfy s 75B(1) … and like provisions, it is not necessary to know those facts are capable of characterisation in the language of the statute”: see Rural Press v ACCC at 74 [48]. This is another aspect of the longstanding principle that it is not necessary for a person to “recognize” the contravention as such, or explicitly to think about the relevant legislation that their actions may contravene: see Giorgianni at 506 and Yorke v Lucas at 676 per Brennan J, citing Johnson v Youden [1950] 1 KB 544 at 546.
255 Whether there is any merit in the Rafferty parties’ submission that it was unnecessary for them to establish that Madgwicks knew the Code applied depends in the first place upon the correct identification of the essential elements constituting the contraventions of s 51AD of the TPA by T2SA and Embleton. With reference to the RA, we consider that these elements were: (1) a corporation (2) acting in trade and commerce (3) entering a franchise agreement (3) without giving a copy of the Code and a disclosure document to the prospective franchisee 14 days before the franchisee enters the franchise agreement; and/or (4) without receiving written statements from the prospective franchisee to the effect that the franchisee has received, read and had a reasonable opportunity to understand the disclosure document and the Code, and has been given advice by an independent lawyer, business advisor or accountant about the proposed franchise agreement, or has been told that that kind of advice should be sought and has decided not to seek it. With reference to the HOA, the elements were much the same, save that the third element was the entering into an agreement to enter into a franchise agreement.
256 That is, on the above analysis, an essential element constituting the contraventions of s 51AD in this case was the fact that the franchisor (T2SA, in the case of the RA and Embleton, in the case of the HOA) entered into a franchise agreement, or an agreement to enter into a franchise agreement. The authorities recognise that an essential fact may be the presence or absence of a document having a particular legal significance: see Giorgianni at 483-484 per Gibbs CJ, citing Callow v Tillstone (1900) 83 LT 411 (a veterinary surgeon was not an accessory to a butcher’s selling unsound meat where a certificate had been honestly but negligently given by the veterinary surgeon that meat was sound and healthy and even though the effective cause of the principal offence by the butcher was the negligent certification) and Smith v Jenner [1968] Crim L R 99 (a driving instructor was not an accessory to a learner driver’s offence of driving without a licence where the instructor had no knowledge that licence had expired).
257 Where the Franchising Code is the applicable industry code, the existence of a franchise agreement, or an agreement to enter into a franchise agreement is the sine qua non of any contravention of s 51AD. Thus in order for Madgwicks to hold the requisite intent, Madgwicks had to be aware that T2SA in the case of the RA, and Embleton in the case of the HOA, were entering into a franchise agreement and an agreement to enter a franchise agreement respectively. Consistently with Rural Press, Madgwicks was not required to make the correct legal judgment that the Code applied, nor was Madgwicks required to know that the relevant conduct was a contravention of s 51AD. However, Madgwicks was required to know that the RA was a franchise agreement and the HOA was an agreement to enter a franchise agreement.
258 Accordingly, having regard to our identification of the essential elements of the s 51AD contraventions in this case, we accept, as the Rafferty parties submitted, that, in order to establish that Madgwicks fell within s 75B as a person involved in the contraventions of s 51AD by T2SA and Embleton, it was not necessary for the Rafferty parties to establish that Madgwicks knew that the Code applied to or in relation to the RA and the HOA. It was, however, necessary for Madgwicks to know, with respect to the RA, that T2SA was entering into a franchise agreement and, with respect to the HOA, that Embleton was entering into an agreement to enter into a franchise agreement. In view of our conclusion on this point, it is unnecessary to address the submissions of the Rafferty parties that essential elements of a contravention could only be composed of matters of fact and not matters of fact and law.
259 It remains to consider whether Madgwicks knew that the relevant parties were relevantly entering into a franchise agreement or an agreement to enter into a franchise agreement. This depends on the evidence as to Madgwick’s knowledge at the relevant time. It by no means follows from the foregoing discussion that the trial judge erred in finding that Madgwicks did not have the requisite knowledge to be “involved in” the s 51AD contraventions. As noted earlier, the trial judge considered the evidence as to Madgwick’s knowledge in some detail. This evidence was relevant to whether Madgwicks knew that Embleton was entering into an agreement to enter into a franchise agreement and, subsequently, that T2SA was entering into a franchise agreement.
260 In support of their submission regarding the sufficiency of Madgwicks’ knowledge, the Rafferty parties referred the Court on the hearing of the appeal to some of the evidence adduced at trial, namely: (1) evidence as to the meeting at Deloitte on 27 September 2007; (2) Madgwicks’ letter of 1 October 2007; (3) Ms Harris’ internal email to Mr Levy and an email to Mr Rafferty on 5 October 2007; (4) Ms Harris’ email to Mr Rafferty on 8 October 2007; (5) Madgwicks’ letter of 11 October 2007; and (6) evidence of the meeting at Deloitte on 16 October 2007. The Rafferty parties invited the court to find that Madgwicks were aware that, before the parties entered into the HOA and the RA, there was a real risk that the HOA was an agreement to enter into a franchise agreement and the RA, a franchise agreement, to which the Code applied. As we have already indicated, the relevant inquiry was not whether Madgwicks was aware the Code applied. Rather, the relevant inquiry was whether Madgwicks knew that the agreements were, respectively, an agreement to enter into a franchise agreement and a franchise agreement. We consider the Rafferty parties’ submissions on this more limited basis. The Rafferty parties’ submission was in effect that Madgwicks was not “honestly ignorant” (to adopt Brennan J’s words in Yorke v Lucas at 677).
261 In this context, it is important to bear in mind that the knowledge that a person must have in order to be “a person involved in a contravention” within s 75B(1)(a) or (c) is actual knowledge. The weight of authority is now clear on this point. See Rural Press at 74 [48] and Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at 4 per Heerey, Sundberg and Dowsett JJ; see also Bowler v Hilda Pty Ltd [2000] FCA 899 at [77] per Finn J. This means that, notwithstanding occasional judicial statements to the contrary (e.g., Ridgway v Consolidated Energy Corporation Pty Ltd (1986) 7 IPR 452 at 457) constructive knowledge is not enough. The existence of actual knowledge may be inferred from wilful blindness (see Australian Competition and Consumer Commission v IMB Group Ltd [2003] FCAFC 17 at [135]) or from dishonest or deliberate ignorance (see Giorgianni at 482-483, 495, 507-508). Brennan J’s reference (in Yorke v Lucas at 677) to “honest ignorance” was an indirect reference to this latter concept; that is, his Honour was referring to a state of mind from which no inference of actual knowledge might be drawn.
262 The trial judge in his reasons considered much of the evidence to which the Rafferty parties referred: see, for example, [70]-[71], [73], [76] and [78] above. His Honour specifically found that, “on 1 October 2007, Mr Levy and Ms Harris considered that the proposed HOA was very unlikely to be a franchise agreement (because it was proposed that it would not legally require T2W to enter into the proposed Rights Agreement)”. See Rafferty v Times 2000 at [187]. It was plainly open to his Honour to make this finding. Neither his Honour nor the Rafferty parties on appeal suggested that Madgwicks had done anything underhand in the drafting of the HOA. Further, his Honour evidently considered that Madgwicks’ belief (as informed by Mr Levy and Ms Harris) was genuine (notwithstanding that at a later date the Court found it to be incorrect). There is nothing in the evidence to indicate that Mr Levy or Ms Harris entertained a relevantly different opinion about the HOA between 1 and 5 October 2007.
263 The trial judge went on to find that: (1) “[o]n 11 October 2007, Mr Levy and Ms Harris considered that the proposed Rights Agreement might constitute a franchise agreement”, and that whether or not it did would depend on the proposed marketing of the Time 2000 product and the extent to which Embleton proposed to impose a common marketing program: see Rafferty v Times 2000 at [188]. His Honour’s finding is borne out by the terms of the letter of 11 October 2007, to which the Court was taken on the hearing of the appeal. Amongst other things, that letter specifically stated:
[I]t is essential that, before we prepare the Rights Agreement, we have full details of the proposed marketing of the Time 2000 product and the extent to which Embleton Pty Ltd proposes to require licensees to adopt a common marketing program. As this is a very specialised area of law, we suggest that you provide us with a memorandum outlining the manner in which Embleton Pty Ltd proposes that the marketing of the product should be handled and we shall then instruct a practitioner, experienced in the area of franchising law, to advise whether the Rights Agreement is likely to fall within or outside the operation of the Code.
That is, as at 11 October 2007, neither Mr Levy nor Ms Harris (and therefore not Madgwicks) were able to form a view about whether or not the RA was in fact a franchise agreement, because they had not received what they regarded as the necessary information from their client.
264 At a meeting on 16 October 2007, the trial judge found, “Mr Levy and Ms Harris were advised that the licensor would not be providing or imposing any marketing system, policies or procedures”. See Rafferty v Time 2000 at [189]. Given the analysis set out in their 11 October 2007 letter, this was no doubt significant for Mr Levy and Ms Harris in concluding there was no franchise agreement. His Honour said (at [189]):
If the matter had been left there, the position might have been clear enough. However, it seems it was made clear by Mr Donovan, or Mr Downes in Mr Donovan’s presence, that there was insufficient time (having regard to Mr Donovan’s desired timetable) for the licensor to comply with the Franchising Code and that that was a factor in Mr Donovan’s approach. It seems that the door was left open for the question to be reconsidered “depending upon any decisions being reached regarding the future imposition of a marketing program”. That is a quote from Ms Harris’s memorandum dated 23 September 2008. It seems most likely that clause 12 of the RA was drafted by Ms Harris to meet the eventuality of the licensor (Embleton or T2SA) wishing to develop a common marketing system for all of its licences.
As noted earlier, the RA was entered into on 19 December 2007.
265 Having considered the evidence as a whole, including Ms Harris’s memorandum of 23 September 2008, the trial judge found that “neither Ms Harris nor Mr Levy considered that the RA was a franchise agreement”. See Rafferty v Time 2000 at [191]. His Honour held (at [191]) that, since they had not been given instructions about the proposed marketing of the MAUs, “they relied on their view that the RA did not constitute a franchise agreement and the fact that they had advised Mr Donovan that Embleton or T2SA should not impose a marketing system and that Mr Donovan had said that that would not be done”.
266 The trial judge held (at [192]) that, though incorrect in their opinion about the HOA and the RA, Mr Levy and Ms Harris “did not know, nor were they wilfully blind to the fact, that the agreements fell within the provisions of the Franchising Code”. We have held that his Honour relevantly misdirected his inquiry. Rather than focus on knowledge of the application of the Code, his Honour ought to have considered Madgwick’s knowledge of whether, in relation to the RA, T2SA was entering a franchise agreement and, in relation to the HOA, whether Embleton was entering an agreement to enter a franchise agreement. Having regard to the whole of the evidence, including Ms Harris’ 23 September 2008 memorandum (see [84] above) and to the fact no error is disclosed in his Honour’s findings as to the effect of the evidence concerning Madgwicks’ knowledge of the essential facts (as we have identified them), it cannot be said that Mr Levy and Ms Harris knew, or were wilfully blind, to the fact that Embleton was entering into an agreement to enter into a franchise agreement and that T2SA was entering into a franchise agreement – even though the Court has found that this was the effect of the respective agreements.
267 It has to be borne in mind that his Honour found that Mr Levy and Ms Harris were honest witnesses and that his findings reflected this assessment of their credibility. This assessment has not been impugned. His Honour had the advantage of hearing the witnesses and of being taken to all the evidence. We can discern no error in his Honour’s findings as to what Madgwicks (through Mr Levy and Ms Harris) believed about whether the HOA was an agreement to enter a franchise agreement and the RA, a franchise agreement. His Honour’s findings deny that Madgwicks had actual knowledge that the HOA constituted an agreement to enter into a franchise agreement and that the RA constituted a franchise agreement. As we have explained, the evidence and his Honour’s unimpeachable findings also preclude the possibility that Madgwicks was wilfully blind to these possibilities.
268 It follows that, although we would not identify the essential elements of the s 51AD contraventions as his Honour did, we discern no error in his Honour’s ultimate conclusion that Madgwicks did not have sufficient knowledge to be involved in the contraventions of s 51AD by T2SA and Embleton. That is, the fact Madgwicks did not know that the RA was a franchise agreement and the HOA, an agreement to enter into a franchise agreement, was fatal to the Rafferty parties’ case against Madgwicks based on s 75B of the TPA.
269 The matter of the sufficiency of Madgwicks’ participation was raised by Madgwicks’ amended notice of contention. It is, however, unnecessary to consider the matter of participation further because we would reject the Rafferty parties’ submissions on this limb of their appeal. Hence, there is also no occasion to consider whether his Honour was correct in saying that Madgwicks did not argue at trial that their level of participation in the contravention did not meet the requirements of s 75B(1) of the TPA: see Rafferty v Time 2000 at [323].
Whether Madgwicks’ conduct was misleading and deceptive for the purposes of the FTA
270 The Rafferty parties also argued on their appeal that the trial judge erred in holding that Madgwicks had not engaged in misleading or deceptive conduct within s 9 of the FTA.
271 Like s 52 of the TPA, s 9(1) of the FTA provides that “[a] person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”. Madgwicks did not contend that their conduct was otherwise than in “trade or commerce” for the purpose of s 9(1) of the FTA. A person who suffers loss, injury or damage because of a contravention of a provision of [the FTA] may recover the amount of the loss or damage or damages in respect of the injury … against any person who contravened the provision or was involved in the contravention”: see s 159(1).
272 In their further amended statement of claim as it stood at trial, the Rafferty parties pleaded (at par [38P]) that:
At no time did Madgwicks inform the applicants, directly or indirectly … that the agreements in the terms prepared by Madgwicks would, if executed by the applicants constitute a ‘franchise agreement’ and a ‘franchise system’ … and thereby represented to the applicants that the transactions as contemplated by and given effect to under the agreements … did not constitute a ‘franchise agreement’ and a ‘franchise system’.
273 The Rafferty parties contended on the appeal that the trial judge mistook the case that they sought to make; and that, in consequence, in considering the application of s 9, his Honour incorrectly confined the test of application to a requirement that Mr Rafferty had “a reasonable expectation” that Madgwicks would advise him as to the application of the Code to the agreements. In written submissions, the Rafferty parties contended:
The complaint of Mr Rafferty is not that he had a reasonable expectation that Madgwicks would have advised him that the agreements constituted a franchise agreement … but that he was wholly unaware, by reason of the conduct of Madgwicks, of his entitlement to be informed of the matters required under the Franchising Code.
…
It is precisely because the Donovan Respondents were represented by a reputable law firm that Mr Rafferty believed (incorrectly) that the Donovan Respondents would comply with their legal obligations.
274 On the hearing of the appeal, however, the Rafferty parties’ identification of the alleged error proved elusive. In oral submissions on the hearing of the appeal, counsel for the Rafferty parties submitted that:
Mr Rafferty was entitled to expect that Madgwicks would comply with all the legislative requirements in relation to that transaction, and that what led to his being misled was that they did not. … It was the fact that circumstances were such that Mr Rafferty was entitled to assume, or had a reasonable expectation that Madgwicks would comply with the legislative requirements in relation to such a transaction. (Emphasis added)
275 Ultimately, as counsel for Mr Rafferty effectively conceded in discussion with the Court, since Madgwicks made no affirmative representation to the alleged effect, the Rafferty parties’ case depended on whether, in the circumstances, silence on Madgwicks’ part amounted to misleading or deceptive conduct. Thus, in the discussion at the hearing of the appeal, the Rafferty parties agreed that the issue was one of “a failure to act”, or “silence”.
276 We conclude that the case as outlined in the Rafferty parties’ pleading and orally on the hearing of the appeal was, in substance, the claim that his Honour addressed: see Rafferty v Time 2000 at [284], [287]. This being so, for the reasons stated below, his Honour did not apply the wrong test.
277 The parties agreed that, with respect to an alleged representation by silence, the correct starting point was, as his Honour indicated, Demagogue v Ramensky, which stands primarily for the proposition that the significance of silence depends on the circumstances of the case. As Black CJ stated (at 32):
Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of ‘mere silence’ or of a duty of disclosure can divert attention from that primary question. Although ‘mere silence’ is a convenient way of describing some fact situations, there is in truth no such thing as ‘mere silence’ because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.
See also Gummow J (with whom Cooper J agreed) at 41.
278 The authorities recognise that the circumstances in which silence may support a finding of misleading or deceptive conduct are not properly subject to any unifying principle. Nonetheless, the authorities also acknowledge that, if the circumstances of a particular case would give rise to a reasonable expectation that, if a fact existed, it would be disclosed, then the failure to disclose that fact may give rise to an inference that the fact does not exist. In this situation (i.e., where there is such a reasonable expectation), a failure to disclose the existence of that fact could constitute misleading and deceptive conduct. See, e.g., Kimberley NZI Finance Limited v Torero Pty Ltd (1989) ATPR (Digest) 46-054 at 53,195; Demagogue v Ramensky at 32, 41; Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 at 114 (“Winterton Constructions”); Warner v Elders Rural Finance Ltd (1993) 41 FCR 399 at 405; and Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288 at 296-298.
279 Inherent in this analysis is the proposition that the existence of a reasonable expectation depends on all the relevant circumstances of the case, including the relationships between the participants in the relevant conduct. Kabwand Pty Ltd & Ors v National Australia Bank Ltd [1989] ATPR 40-950 at 50,377 (no duty – in other words no reasonable expectation – that a bank would disclose to a purchaser from a customer of the bank that the purchased business was unprofitable and that the customer owed the bank money in respect of it) and Winterton Constructions at 114-115 (no duty or reasonable expectation that a merchant bank would disclose the financial affairs of a developer borrowing from the bank to a builder entering into a contract with the developer) are illustrative of this proposition. His Honour took into account all these circumstances (including the relationships between the participants) in concluding that there was no evidence to support the suggestion that Mr Rafferty had a reasonable expectation that Madgwicks would advise him that the HOA and the RA were agreements to which the Franchising Code applied. See Rafferty v Time 2000 at [278]-[283] and [301]. Hence, by their silence on the point, Madgwicks were not to be taken as making any representation as to whether or not the Franchising Code applied to the HOA or the RA.
280 Contrary to the Rafferty parties’ submission, it was relevant in this case that Madgwicks acted at all times for Mr Donovan and his interests in relation to their dealings with Mr Rafferty. Madgwicks owed legal and professional obligations, including a duty of confidence, to Mr Donovan. The fact that Madgwicks owed a duty of confidence and that any non-disclosure by them was not deliberate were not, as the Rafferty parties submitted, irrelevant to his Honour’s consideration. His Honour was entitled to regard these matters as supportive of his ultimate finding.
281 Accordingly, there is no error shown in his Honour’s finding that the Rafferty parties had not made out their claim that Madgwicks had engaged in misleading or deceptive conduct within s 9 of the FTA.
282 For the reasons stated, we would dismiss both the appeals, with costs
I certify that the preceding two hundred and eighty two (282) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Kenny, Stone and Logan. |
Associate:
